Question

The next dividend payment by Dizzle, Inc., will be $2.48 per share. The dividends are anticipated to maintain a growth rate of 4.5 percent forever. If the stock currently sells for $39.85 per share, what is the required return

Answer 1

Answer:

Cost of equity   = 10.7%

Explanation:

According to the dividend valuation, the value of a stock is the present value of expected future dividends discounted at the required rate of return.

The model can me modified to determined the cost of equity as follows:

Cost of equity = D/P  + g

d- dividend payable next period, p- price of stock ,, - g- growth rate

D- 4.5%, p- $2.48 , g -4.5%

Cost of equity = (2.48 /39.85) + 0.045

                      = 10.7%