Question

The Absolute Zero Co. just issued a dividend of $2.70 per share on its common stock. The company is expected to maintain a constant 5.6 percent growth rate in its dividends indefinitely. If the stock sells for $54 a share, what is the company's cost of equity?

Answer 1

10.88%

Explanation:

According to the given situation, the computation of the company's cost of equity is shown below:-

Stock price = (Current dividend × (1 + Growth rate)) ÷ (Cost of equity - Growth rate)

$54 = ($2.70 × (1 + 0.056)) ÷ (Cost of equity - 0.056)

Cost of equity = $2.8512 ÷ $54 + 0.056

= 10.88%

Therefore for computing the cost of equity we simply applied the above formula.