Question

Judy's Boutique just paid an annual dividend of $3.73 on its common stock. The firm increases its dividend by 3.40 percent annually. What is the company's cost of equity if the current stock price is $43.96 per share

Answer 1

Answer:

cost of equity = 12.16 %

Explanation:

given data

annual dividend of $3.73

increases dividend = 3.40 percent annually

stock price = $43.96 per share

to find out

What is the company's cost of equity

solution

we will use here Gordon model for compute company's cost of equity that is

market value = $\frac{dividend* ( 1+growth\ rate)}{cost\ of\ equity - Growth\ rate}$         ........................1

put here value we get

43.96 = $\frac{3.73* ( 1+0.034)}{cost\ of\ equity - 0.034}$

solve it we get

cost of equity =  0.121735

cost of equity = 12.16 %