Question

The Green Balloon just paid its first annual dividend of $0.49 a share. The firm plans to increase the dividend by 3.7 percent per year indefinitely. What is the firm's cost of equity if the current stock price is $17.2 a share

Answer 1

3.80%

Step-by-step explanation:

The computation of the cost of equity is shown below:

Cost of equity is

= Annual dividend paid × (1 + growth rate) ÷ Stock price + Growth rate

where,

Annual dividend paid is $0.49

Growth rate is 3.7%

And, the stock price is $17.2

Now placing these values to the above formula

So, the cost of equity is

= $0.49 × (1 + 0.037) ÷ $17.20 + 0.037

= 0.00105 + 0.037

= 3.80%