Question

The down and out co. just issued a dividend of $2.40 per share on its common stock. the company is expected to maintain a constant 5.5 percent growth rate in its dividends indefinitely. if the stock sells for $52 a share, the company's cost of equity is . percent. (do not include the percent sign (%). round your answer to 2 decimal places. (e.g., 32.16))

Answer 1

The cost of equity is calculated as -

Cost of equity = Expected dividend / Current price + Growth rate

Expected dividend = Current dividend * ( 1 + growth rate)

Expected dividend = $ 2.40 * ( 1 + 5.5%) = $ 2.532

Current price = $ 52

Growth rate = 5.5 %

Cost of equity = ($ 2.532 / $ 52) + 5.5 %

Cost of equity = 10.37 %