Question

A company is expected to pay a dividend of $1.90 next year. Dividends are expected to grow at a constant rate of 3% per year, and the stock price is currently $12.50. The company's marginal tax rate is 40%. Compute the cost of internal equity

Answer 1

The answer is 18.2%

Step-by-step explanation:

To calculate the cost of internal 1.9equity here, we employ 'dividend growth method.

The formula is:

(D÷P) + g

Where D is expected dividend to be paid

P is the current share price.

g is growth rate

D - $1.90

P - $12.50

g - 3% or 0.03

(1.90÷12.50) + 0.03

=0.152 + 0.03

0.182

Expressed as a percentage:

0.182 x 100%

18.2%