Q Estimate the future cost of equity (r E ) using the Dividend Growth Model. (a)

Question

Q Estimate the future cost of equity (rE) using the Dividend Growth Model.

(a) 3 year Dividend growth rate (g) ( the growth rate over 3 years, calculated as the

annualized rate of growth between the current year’s dividend per share and the dividend per share 3 years prior) = 17.88% convert the three year growth rate to an effective quarterly rate dividend growth rate

Cash Dividend (D0)= 0.3125, Stock Price (P0)=75.78

(b) Using the information above to calculate the quarterly cost of equity using the dividend growth model.

(c) Use the quarterly cost of equity to find the effective annual cost of equity.

Explanation / Answer

Price= DPS0(1+g)/Ke-g 75.78=.3125(1+.0679)/Ke-.0679 7.23% Working Note: D3= Do(1-.1788) 0.256625 Growth =( D0/D3)^(1/3) (.3125/.256625)^(1/3) 6.79%

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

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