Question

The Drogon Co. just issued a dividend of $2.80 per share on its common stock. The company is expected to maintain a constant 4.5 percent growth rate in its dividends indefinitely. If the stock sells for $58 a share, what is the company’s cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

9.54%

Step-by-step explanation:

we can use the dividend growth model (Gordon model) to calculate the cost of equity (Re):

current stock price (P₀) = next future dividend (Div₁) / [cost of equity (Re) - constant growth rate (g)]

Div₁ = $2.80 x 1.045 = $2.926

$58 = $2.926 / (Re - 0.045)

Re - 0.045 = $2.923 / $58 = 0.05045

Re - 0.045 = 0.05045

Re = 0.05045 + 0.045 = 0.0954 = 9.54%