(Cost of equity) MAM just declared a dividend of $3.2 per share of common stock. The current stock price is $25 per share. The dividend is expected to increase at a rate of 8% per year for the future.

(Cost of equity) MAM just declared a dividend of $3.2 per share of common stock. The current stock price is $25 per share. The dividend is expected to increase at a rate of 8% per year for the future. The beta of its common stock is 1.1 and the market risk premium is 9%. The risk-free rate=5%. According to the dividend growth model approach, the cost of the equity capital is

_________%.

Expert Solution

According to dividend discount model,

Cost of equity = [D0*(1+g) / P0]+g

Where, D0 is current dividend paid

g is growth rate

P0 is current price of stock

Cost of equity = [$3.2*(1+0.08) / $25]+0.08

= ($3.456 / $25) + 0.08

= 0.1382 + 0.08

= 0.2182 or 21.82%

Therefore, cost of equity capital according to dividend discount approach is 21.82%.

Umair answered 1 year ago

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