Question

Raven Co. expects to pay a dividend of $5.25 per share in one year. The current price of their common stock is $65.50 per share. What is the cost of internal common equity if the long-term growth in dividends is projected to be 5.2 percent indefinitely?

Answer 1

r = 0.13215 or 13.215% rounded off to 13.22%

Step-by-step explanation:

Using the constant growth model of dividend discount model, we can calculate the price of the stock today. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula for price today under this model is,

P0 = D1 / (r - g)

Where,

D1 is dividend expected for the next period /year

g is the growth rate

r is the required rate of return or cost of equity

Plugging in the values of P0, D1 and g in the formula, we can calculate the value of r to be,

65.5 = 5.25 / (r - 0.052)

65.5 * (r - 0.052) = 5.25

65.5r - 3.406 = 5.25

65.5r = 5.25 + 3.406

r = 8.656 / 65.5

r = 0.13215 or 13.215% rounded off to 13.22%