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PSYCHO15rus [73]
3 years ago
15

The Drogon Co. just issued a dividend of $3.00 per share on its common stock. The company is expected to maintain a constant 6.2

percent growth rate in its dividends indefinitely. If the stock sells for $60 a share, what is the company’s cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places.
Business
1 answer:
Mars2501 [29]3 years ago
5 0

Answer:

The company’s cost of equity is 11.51%.

Explanation:

Please find the below for detailed explanations and calculations:

The company's cost of equity need to be found is the discounted rate that will bring net present value of its projected future dividend to its current stock price.

Denote cost of equity need to be found is x.

We apply the formula to calculated the present value of growing perpetuity to find x as shown below:

[ 3 x ( 1+0.062) ] / ( x - 0.062) = 60 <=> 3.186 / ( x - 0.062) = 60 <=> x = 11.51%.

Thus, the company's cost of equity is 11.51%.

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Answer:

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2. Return on sales ratio:

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Explanation:

1. The formula to compute the gross margin percentage is shown below:

Gross margin percentage = (Gross margin) ÷ (Net sales) × 100

For Denver  = ($17,760 ÷ $33,200) × 100 = 53%

For Reno = ($23,850 ÷ $86,900) × 100 = 27%

2. The formula to compute the return-on-sales ratios is shown below:

Return-on-sales ratio = (Net income) ÷ (Net sales) × 100

For Denver  = ($6,000 ÷ $33,200) × 100 = 18%

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