Question

A firm has common stock with a market price of $25 per share and an expected dividend of $2 per share at the end of the coming year. The growth rate in dividends has been 5 percent. The cost of the firm's common stock equity is ________.

Answer 1

Answer: 13%

Explanation: The cost of equity can be defined as the return a company pays to its shareholders in return of bearing the risk of investing in the company.

As per the given figures in the question we can say that cost of equity can be determined with the help of dividend discount model, which can be equated as follows :-

$k_{e}= \frac{D1}{P0}+G$

where,

ke = cost of equity

D1 = expected dividend

P0 = current price

G = growth rate

So, putting the values into equation we get :-

$k_{e}= \frac{\ 2}{\ 25}+5\%$

               = 13%