Chelsea Fashions is expected to pay an annual dividend of $1.26 a share next year. The...
Chelsea Fashions is expected to pay an annual dividend of $1.26 a share next year. The market price of the stock is $24.09 and the growth rate is 2.6 percent. What is the cost of equity?
Multiple Choice
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7.91 percent
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9.77 percent
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9.24 percent
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7.54 percent
-
7.83 percent
Homework Answers
Here
Dividend next year D1 = $1.26
share price P= $24.09
growth rate g= 2.6%
cost of equity r= ?
we will use dividend discount model to find out cost of equity
share price P = D1/(r-g)
24.09 = 1.26/(r-2.6%)
24.09*r-24.09*0.026 =1.26
24.09*r = 1.26+0.626
24.09r = 1.89
r= 0.0783
r = 7.83%
Hence cost of equity is 7.83% so last option is correct here.
Thanks
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