The Lo Tech Co. just issued a dividend of $2.60 per share on its common stock. T

Question

The Lo Tech Co. just issued a dividend of $2.60 per share on its common stock. The company is expected to maintain a constant 4 percent growth rate in its dividends indefinitely.

If the stock sells for $43.40 a share, what is the company’s cost of equity? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

The Lo Tech Co. just issued a dividend of $2.60 per share on its common stock. The company is expected to maintain a constant 4 percent growth rate in its dividends indefinitely.

Explanation / Answer

Value of Stock = D / (Ke – G)

D = Dividend
Ke = Cost of Equity
G = Growth Rate

$43.40 = $2.60 / (Ke – 0.04)
$43.4 / $2.60 = 1 / (Ke – 0.04)
$16.69 = 1/ (Ke – 0.04)
$16.69Ke = 1 + 0.6676
Ke = 0.09991 or 9.99% (10 % Approx)

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