Judy's Boutique just paid an annual dividend of $2.35 on its common stock. The firm increases its dividend by 3.15 percent annua

Question

2 years ago

5

lly. What is the company's cost of equity if the current stock price is $38.44 per share

1 answer:

miss Akunina [59] · Answer 1 · 2023-10-09T02:03:18+03:00

The company's cost of equity is 9.45%

Given that

Annual dividend paid, D0 = $2.35

Dividend growth rate, g = 3.15% = 0.0315

Current stock price per share = $38.44

Now,

Current price of share = D1 ÷ (r - g) -(1)

Here,

r is the required rate of return

D1 = dividend at year 1 = D0 × (1 + g)

= $2.35 × (1 + 0.0315)

= $2.424045

Therefore, from (1) we get

$38.44 = $2.424045 ÷ (r - 0.022)

(r - 0.0315) = 0.063060

r = 0.063060 + 0.0315

r = 0.09456

r = 0.0945 × 100% = 9.45%

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