Question

Sweet Treats common stock is currently priced as $36.72 a share. The company just paid $2.18 per share as its annual dividend. The dividends have been increasing by 2.2 percent annually and are expected to continue doing the same. What is the cost of equity?

Answer 1

Answer:

8.27%

Explanation:

Data provided in the question:

Current price = $36.72

Annual dividend paid, D0 = $2.18

Dividend growth rate, g = 2.2% = 0.022

Now,

Cost of Equity = [ (Dividend For Next Year) ÷ Current Price ] + Growth rate

= [ ( D0 × ( 1 + g  ) ) ÷ $36.72 ] + 0.022

= [ ( $2.18 × ( 1 + 0.022  ) ) ÷ $36.72 ] + 0.022

= [ 2.22796  ÷ $36.72 ] + 0.022

= 0.06067 + 0.022

= 0.08267

or

= 0.08267 × 100% = 8.267% ≈ 8.27%