Question

Last week, lester's electronics paid an annual dividend of $2.00 on its common stock. the company has a longstanding policy of increasing its dividend by 6.0 percent annually. this policy is expected to continue. what is the firm's cost of equity if the stock is currently selling for $42.15 a share?

Answer 1

Cost of equity = D1/P0+ g as per the Dividend distribution model (DDM)

Cost of equity = D0*(1+g)/P0 +g

Cost of equity = 2.00*(1+0.06)/42.15 + 0.06 =2*(1.06)/452.15 +0.06 = 0.1103 = 11.03%

Cost of equity = 11.03%