Question

Countess Corp. is expected to pay an annual dividend of $5.05 on its common stock in one year. The current stock price is $77.75 per share. The company announced that it will increase its dividend by 3.60 percent annually. What is the company's cost of equity?

Answer 1

Answer:

Cost of equity = 10.10%

Explanation:

Cost of equity can be ascertained using the dividend valuation model. The model states that the price of a stock is the present value of future dividends discounted at the required rate of return.  

Ke=( Do( 1+g)/P ) + g  

g- growth rate in dividend, P- price of the stock, Ke- required return, D- dividend payable in now

DATA

D0- (1+g) = 5.05

g- 3.60%

P- 77.75

Note that the D0× (1+g) simply implies the dividend expected in year one, that is one year from now. And this has been given as 5.05 in the question, hence there is no need to apply the growth rate again.

Cost of equity = (5.05/77.75   + 0.036)×  100= 10.095%

Cost of equity = 10.10%