Question

Calculating Cost of Equity. The Lo Tech Co. just issued a divident of $2.20 per share on its common stock. The company is expected to maintain a constant 6 percent growth rate in its dividends indefinitely. If the stock sells for $43 a share, what is the company's cost of equity?

Answer 1

Expected Return pg 383 7th edition Corporate Finance

Projected Dividend

Current Dividend X (1 + Growth Rate)

$2.20 X (1 + 0.06)
$2.20 X 1.06
$2.33

Exp Ret = New Dividend/Current Selling Price + Growth Rate
Exp Ret = $2.33 / $43 + 0.06
Exp Ret = 0.0541 + 0.06

Exp Ret = 11.42%

What is the company’s cost of equity? 11.42%