Question

Clancy's just paid its annual dividend of $1.48 per share. Analysts expect the stock price to increase by 2.1 percent annually and value the stock at $14.65 per share currently. What is the cost of equity for this firm

Answer 1

Cost of equity = 13.6%

Step-by-step explanation:

We will work out the cost of equity, using the the dividend valuation model. The model states that the value of a stock is the present value of the future divided discounted at the cost of equity.

The model is given below:

P = D× (1+g)/(r-g)

P- price of stock, D- dividend payable now, g- growth rate in dividend, r- cost of equity

So we substitute

14.65 = 1.48× (1+r)/(r-0.021)

cross multiplying

(r-0.021)× 14.65 = 1.48 × (1+r)

14.65r - 0.30765 = 1.48 + 1.48r

collecting like terms

14.65r - 1.48r = 1.48 + 0.30765

13.17 r = 1.78765

Divide both sides by 13.17

r =1.78 /13.17= 0.135

r=0.135× 100= 13.6

Cost of equity = 13.6%

=0.135736522