Question

Topstone Industries is expected to pay a dividend of $2.10 per share in one year. This dividend, along with the firm's earnings, is expected to grow at a rate of 5% forever. If the current market price for a share of Topstone is $38.62, what is the cost of equity

Answer 1

Answer: 10.4%

Step-by-step explanation:

To calculate the cost of equity, we will use the formula:

Current market price = D1/Ke - g

where,

D1 = expected dividend = $2.10

Ke = cost of equity

g = constant growth rate = 5%

Current market price = D1/Ke - g

$38.62 = $2.10/Ke - 5%

$38.62 = $2.10/Ke - 5%

Ke = $2.10/$38.62 + 0.05

Ke = 0.054 + 0.050

Ke = 0.104 = 10.4%

Cost of equity is 10.4%