In: Finance
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
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 |