Question

The Vogt corporation paid a dividend of $4.20 on its stock in the year just ended. If the dividends are projected to grow at a rate of 6.4% indefinitely, and the stock is presently selling for $68 a share, what is the estimated cost of equity for Vogt?

Answer 1

cost of equity = 13%

Step-by-step explanation:

With the info given, we will use cost of equity formula from Dividend Growth Model. THis is given by:

`k_e=(D_1)/(P_0)+g`

Where D_1 is the next year dividend or D_1 = D_0(1+g)

P_0 is current stock price

g is the growth rate

Since D_0 (dividend this year) is 4.20 and g = 6.4% or 0.064, we can calculate D_1:

`D_1=D_0(1+g)=4.2(1+0.064)=4.47`

Current share price is 68, so we can now calculate cost of equity:

`k_e=(4.47)/(68)+0.064=0.13`

Hence,

cost of equity = 13%