A company just paid a $2.00 dividend, expected to grow at 2% indefinitely. If the firm's...

A company just paid a $2.00 dividend, expected to grow at 2% indefinitely. If the firm's stock can be sold for $19 per share, what is the cost of common equity.

a)11.98%

b)11.69%

c)12.01%

d)12.74%

e)none of the above

Solutions

Expert Solution

Ans d)12.74%

P0 =	Price of Share
D1 =	Current Dividend
Ke =	Cost of Equity
g =	growth rate

P0 =	D1 / (Ke - g)
19 =	2.04 / (Ke - 2%)
Ke - 2% =	2.04 / 19
Ke - 2% =	10.74%
Ke =	10.74% + 2%
Ke =	12.74%



D1 =	D0 ( 1 + g)
	2.00 * (1 + 2%)
	$2.0400

jeff jeffy answered 2 years ago

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