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30 January, 08:16

The Drogon Co. just issued a dividend of $2.80 per share on its common stock. The company is expected to maintain a constant 4.5 percent growth rate in its dividends indefinitely. If the stock sells for $58 a share, what is the company's cost of equity?

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  1. 30 January, 09:45
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    9.54%

    Explanation:

    The computation of the company cost of equity is shown below:

    The cost of equity = (Next year dividend : price) + Growth rate

    where,

    Next year dividend is

    = $2.80 + $2.80 * 4.5%

    = $2.80 + $0.126

    = $2.926

    And the price is $58 per share

    And, the growth rate is 4.5%

    So, the cost of equity is

    = ($2.926 : $58) + 4.5%

    = 9.54%
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