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coldgirl [10]
3 years ago
7

Countess Corp. is expected to pay an annual dividend of $4.63 on its common stock in one year. The current stock price is $74.11

per share. The company announced that it will increase its dividend by 3.75 percent annually. What is the company's cost of equity?
Business
1 answer:
Mamont248 [21]3 years ago
7 0

Answer:

r = 0.099974 or 9.9974% rounded off to 10.00%

Explanation:

Using the constant growth model of DDM we calculate the price of a stock today which is expected to pay a dividend which increases at a constant rate through out. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula for price under this model is,

P0 = D1 / r - g

Where,

  • r is the required rate of return or cost of equity
  • g is the constant growth rate in dividends

Plugging in the available values in the formula, we calculate r to be,

74.11 = 4.63 / (r - 0.0375)

74.11 * (r - 0.0375) = 4.63

74.11r - 2.779125 = 4.63

74.11r = 4.63 + 2.779125

r = 7.409125 / 74.11

r = 0.099974 or 9.9974% rounded off to 10.00%

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