Question

ABC’s stock has a beta of 1.30. The company just paid a dividend of $5.74, and the dividends are expected to grow at 2.42 percent. The expected return on the market is 9.04 percent, and Treasury bills are yielding 3.17 percent. The most recent stock price is $79.50. Calculate the cost of equity using the dividend growth model method.

Answer 1

Cost of equity is = (((Dividend per share in the coming year)/Current price of the share)+Growth Rate) Dividend per share in the coming year Just paid dividend * (1+Growth rate)) = Dividend per share in the coming year = (5.74"(1+0.0242)) Dividend per share in the coming year = $ 5.878908 Cost of equity is = (5.878908/79.50)+0.0242 Cost of equity is = 0.07948528+0.0242 Cost of equity is = 0.098148528 Cost of equity is =9.8149% Approx