Question

Reliable Electric is a regulated public utility, and it is expected to provide steady dividend growth of 5% per year for the indefinite future. Its last dividend was $6 per share; the stock sold for $50 per share just after the dividend was paid. What is the company’s cost of equity? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

Answer: 17.6%

Explanation:

Given that,

Dividend growth(g) = 5% per year

Last dividend = $6 per share

Stock sold (P0) = $50 per share

Expected dividend(D) = Last dividend(1 + g)

                               = $6 (1 + 5%)

                               = $6.30

$cost\ of\ equity=\frac{D}{P0}\times100+g$

$cost\ of\ equity=\frac{6.30}{50}\times100+5%$

                               = 12.6% + 5%

                               = 17.6%