Question

Suppose a firm has a beta of 1.5.The market risk premium is expected to be 8%, and the current risk-free rate is 2%. The firm maintains a constant growing dividend policy that grows at 5% per year ; the most recent dividend was $1.8. Currently stock price is $21. Multiple Choice If you use dividend growth model to estimate cost of equity, D1 is $1.8 If you use dividend growth model to estimate cost of equity, D1 is not $1.8

Answer 1

Expected Dividend for next year should be use for determining cost of equity.

Recent dividend = $1.8

Expected dividend = $1.8*1.05

=$1.89

Hence correct option : If you use dividend growth model to estimate cost of equity, D1 is not $1.8