Question

Jetson Industries has a share price of $ 21.57 today. If Jetson is expected to pay a dividend of $ 0.86 this year and its share price is expected to grow to $ 24.83 at the end of the​ year, what is​ Jetson's dividend yield and equity cost of​ capital?

Answer 1

Calculation of Jetson's Dividend Yield:

Dividend Yield refers to the ratio of a company's annual dividend to it's share price .It is represented as a percentage.
Dividend Yield is calculated as follows:

Dividend Yield= Annual Dividend/Share price

Here,

Annual Dividend = $0.86

Share Price= $24.83

Putting these values into the formula for Dividend Yield , we get:

Dividend Yield= $0.86/$24.83 ie. 0.0346 or 3.46%

Thus, Dividend Yield for Jetson is 3.46%

Calculation of Cost of Equity for Jetson:

Cost of Equity refers to return that a company requires to decide for an investment if such investment meets the company's capital require requirements.

Cost of Equity is calculated as:

Cost of Equity=Dividend Yield + Capital Gain Yield

We already have calculated  the Dividend Yield .

Now let us calculate Capital Gain Yield

Capital Gain Yield refers to the rise in the price of a common stock over a specified period of time.

Capital Gain Yield= [End Stock Price-Beginning Stock Price]/Beginning Stock Price

Capital Gain Yield is always expressed in percentage.

Here,End Stock Price= $24.83

Beginning Stock Price= $21.57

Putting these values into the formula for Capital Fain Yield we get:

Capital Gain Yield=[$24.83-$ 21.57]/$21.57 ie. 0.1511 or 15.11%

Now, substituting the values of Dividend Yield and Capital Gain Yield into the formula for Cost of Equity we get:

Cost of Equity= 3.46%+15.11% ie. 18.57%

Thus, the cost of equity for Jetson is 18.57%