Question

Krell Industries has a share price of $ 22.77 today. If Krell is expected to pay a dividend of $ 1.09 this year and its stock price is expected to grow to $ 24.33 at the end of the​ year, what is​ Krell's dividend yield and equity cost of​ capital?

Answer 1

Dividend yield is 4.79%

Cost of equity is 11.64%

Step-by-step explanation:

The dividend yield on Krell Industries share price is the dividend of $1.09 divided by the price of the share today of $22.77

dividend yield=$1.09/$22.77=4.79%

The equity cost of capital can be calculated from the share price formula given below by changing the subject of the formula to cost of equity,r.

stock price=Do*(1+g)/r-g

Do is the dividend paid this year of $1.09

g is the dividend growth of dividend which is computed thus:

g=share price at end of the year-share price now/share price now

g=($24.33-$22.77)/$22.77=6.85%

r is the unknown

stock price is $24.33

24.33=1.09*(1+6.85%)/(r-6.85%)

24.33=1.164665 /r-6.85%

r=(1.164665 /24.33)+6.85%

r=11.64%