Question

The Pierce Co. just issued a dividend of $2.35 per share on its common stock. The company is expected to maintain a constant 5 percent growth rate in its dividends indefinitely. If the stock sells for $44 a share, what is the company's cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity %

Answer 1

Share Price = D₁ / (k - g)

or

Share Price = D₀(1+g) / (k - g)

$ 44 = 2.35(1+0.05) / (k - 0.05)

$ 44 = 2.4675 / (k - 0.05)

(k - 0.05) = 2.4675 / 44

k = 0.05608 + 0.05

k = 0.1061 or 10.61%