Question

The Down and Out Co. just issued a dividend of $1.94 per share on its common stock. The company is expected to maintain a constant 0.04 growth rate in its dividends indefinitely. If the stock sells for $42.35 a share, what is the company's cost of equity

Answer 1

Answer:

Cost of equity will be equal to 0.76 %

Explanation:

We have given dividend just paid $D_0= 1.94$

Growth rate = 0.04

So expected dividend for the next year $D_1=1.84(1+0.04)= 2.017$

Stock price $p_0= 42.35$

We have to find company cost of equity , that is required rate of return

We know that stock price is given by

$p_0=\frac{D_1}{R_E-g}$

So $42.35=\frac{2.017}{R_E-0.04}$

$42.35R_E-1.694=2.017$

$R_E=0.00762$ = 0.76 %