Question

A firm has just paid its annual dividend of $5.64 a share. Thereafter the dividend is expected to increase at a rate of 2% a year. If the firm's stock currently sells for $60 a share, what is the cost of equity

Answer 1

Answer:

11.588 %

Explanation:

The information available allows us to use the Dividend Growth Model to calculate the cost of equity as :

Cost of equity =  Expected dividend ÷ Price per share + growth rate

therefore,

Cost of equity = ($5.64 x 1.02) / $60 + 2 %

                        = 11.588 %