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Lerok [7]
3 years ago
11

Summerdahl Resort’s common stock is currently trading at $36 a share. The stock is expect- ed to pay a dividend of $3.00 a share

at the end of the year (D1 5 $3.00), and the dividend is expected to grow at a constant rate of 5% a year. What is its cost of common equity?
Business
2 answers:
Zigmanuir [339]3 years ago
6 0

Answer:

<u>Cost of common equity is 0.1333 or 13.3%</u>

Explanation:

P= D1/(r-g)

D1=3.00

g= 0.05

P=36

Here we have ,

3.00/(r-0.05) = 36

r-0.05= 3/36= 0.08333

r= 0.1333= 13.33%

masya89 [10]3 years ago
5 0

Answer:

The cost of common equity is 13.33%

Explanation:

The price of a stock whose dividends are growing at a constant rate can be calculated using the constant growth model of Dividend Discount Model approach. The formula for price today under this model is,

P0 = D1 / r - g

Where,

  • D1 is the dividend expected for the next period
  • r is the required rate of return
  • g is the growth rate in dividends

As we know the D1, the price today and the growth rate, we can plug in these values in the formula to calculate the required rate of return or the cost of equity.

36 = 3 / (r - 0.05)

36 * (r- 0.05) = 3

36r - 1.8  =  3

36r = 3 + 1.8

r = 4.8 / 36

r = 0.1333 or 13.33%

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Assembly                     $1,005,040                 68,000 machine-hours

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<u><em></em></u>

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