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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 3 years ago
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