Question

Previous time I tried this problem, I got the answer wrong.

The Muse Co. just issued a dividend of $3.64 per share on its common stock. The company is expected to maintain a constant 6.44 percent growth rate in its dividends indefinitely. If the stock sells for $62 a share, what is the company's cost of equity? (Enter your answer as a percentage, omit the "%" sign in your response, and round your answer to 2 decimal places. For example, 0.12345 or 12.345% should be entered as 12.35.)

You Answered

Correct Answer 12.69

I need a CORRECT answer with STEP-BY-STEP solution to the following (same one but with different numbers):

The Muse Co. just issued a dividend of $3.07 per share on its common stock. The company is expected to maintain a constant 6.57 percent growth rate in its dividends indefinitely.

If the stock sells for $61 a share, what is the company's cost of equity?

Answer 1

Calculation of required rate of return::

D1=D0(1+growth)=3.64(1+0.0644)=$3.8744

growth= 6.44%

Price= $62

Required return= D1/ Price + growth

=3.8744/62+0.0644

=0.0625+0.0644

=0.1269

Required rate of return=12.69

Calculation of required rate of return::

D1=D0(1+growth)=3.07(1+0.0657)=$3.2717

growth= 6.57%

Price= $61

Required return= D1/ Price + growth

=3.2717/61+0.0657

=0.0536+0.0657

=0.1193

Required rate of return=11.93