Question

The Absolute Zero Co. just issued a dividend of $2.65 per share on its common stock. The company is expected to maintain a constant 5.5 percent growth rate in its dividends indefinitely. If the stock sells for $53 a share, what is the company's cost of equity?

Answer 1

10.78%

Step-by-step explanation:

Absolute Zero Co. just issued a dividend of $2.65 per share on its common stock

The growth rate is 5.5%

= 5.5/100

= 0.055

The price of the stock is $53

The first step is to calculate the estimated dividend payment

Div1= Div0×(1+g)

= 2.65×(1+0.055)

= 2 65(1.055)

= $2.7957

Therefore, the company's common cost of equity can be calculated using the constant growth dividend discount model

Po= Div1/r-g

Where Po= stock price, Div1= estimated dividend, r= required rate of return, g= growth rate

53= 2.7957/r-0.055

r-0.055= 0.0528

r= 0.0528+0.055

r= 0.1078×100

r= 10.78%

Hence the company's cost of equity is 10.78%