Question

Gremlin Industries will pay a dividend of $ 1.55 per share this year. It is expected that this dividend will grow by 7​% per year each year in the future. The current price of​ Gremlin's stock is $ 22.10 per share. What is​ Gremlin's equity cost of​ capital?

Answer 1

Answer: 14%

Explanation:

We can calculate this using the Gordon Growth Model which looks like this,

P = D1 / r - g

P is the current stock price

D1 is the next dividend

r is the rate of return or the cost of capital

g is the growth rate.

We have all those figures except the cost of capital so making r the subject of the formula we can solve for it. Doing that will make the formula,

r = D/ P + g

r = 1.55 / 22.10 + 0.07

r = 0.1401

r = 14%

14% is the equity cost of capital.

If you need any clarification do react or comment.

Answer 2

Answer:

Cost of capital for Gremlins is 14.01%

Explanation:

The DDM is used to value a stock by discounting the future dividends with the required return hence it will be used to calculate the required return / cost of equity

SP = D1/ r- g

SP $22.10, D1 $1.55, g 7% plug in the values

22.10 = 1.55/ r - 0.07

22.10 (r- 0.07) =1.55

22.10 (r- 0.07)/22.10 =1.55/22.10

r - 0.07 = 1.55/2.10

r = 1.55/22.10 +0.07

  =0.1401

   =14.01%