Question

Countess Corp. is expected to pay an annual dividend of $5.29 on its common stock in one year. The current stock price is $79.83 per share.
The company announced that it will increase its dividend by 3.40 percent annually.

What is the company's cost of equity?

Answer 1

Answer:

10.03%

Explanation:

Using the dividend discount formula, find the cost of equity; r

$r = \frac{D1}{P0} +g$

whereby,

D1 = Next year's dividend = 5.29

P0 = Current price of the stock = 79.83

g = growth rate of dividends = 3.40% or 0.034 as a decimal

Next, plug in the numbers to the formula above;

$r = \frac{5.29}{79.83} +0.034\\ \\ r =0.06627 + 0.034\\ \\ =0.10027$

As a percentage, r = 10.03%

Therefore, the company's cost of equity is 10.03%