Sweet Treats common stock is currently priced at $36.72 a share. The company just paid $2.18 per share as its annual dividend. The dividends have been increasing by 2.2 percent annually and are expected to continue doing the same. What is the cost of equity

Cost of equity = 8.0%

Explanation:

Cost of equity can be ascertained using the dividend valuation model. The model states that the price of a stock is the present value of future dividends discounted at the required rate of return.

Cost of equity (Ke) = (Do (1+g) / P) + g

g - 2.2%, P - 36.72, D - 2.18

Ke = (2.18 * (1+0.022)) / 38.72 + 0.022) * 100

= 0.07954 * 100

= 8.0%

Cost of equity = 8.0%