Question

The Muse Co. just issued a dividend of $3.10 per share on its common stock. The company is expected to maintain a constant 6.40 percent growth rate in its dividends indefinitely. If the stock sells for $62 a share, what is the company’s cost of equity?

Answer 1

Answer:

The the company’s cost of equity is 11.72%.

Explanation:

Cost of equity = (D1/P0)+g

Here D1 = D(1 + g)

             = (1 + 0.064)* 3.10

             = 3.2984

P0 = 62

g = dividend growth rate = 0.064

Cost of equity = (3.2984/62) + 0.064

                       = 0.0532+0.064

                       = 11.72%

Therefore, the the company’s cost of equity is 11.72%.