P14-1 Calculating Cost of Equity [LO1] The Down and Out Co. just issued a divide

Question

P14-1 Calculating Cost of Equity [LO1]

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))

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))

Explanation / Answer

cost of equity = (D1 / P0 ) + g

D1 = next year dividend = 2.40* 1.055 = 2.532

P0 = share price

g = growth rate

so,

cost of equity = (2.40* 1.055 / 52) + .055 = 0.1037

= 10.37 %

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.