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13 July, 08:24

The Drogon Co. just issued a dividend of $2.21 per share on its common stock. The company is expected to maintain a constant 5 percent growth rate in its dividends indefinitely. If the stock sells for $55 a share, what is the company's cost of equity?

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  1. 13 July, 10:26
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    9.22%

    Explanation:

    The formula to compute the cost of common equity under the DCF method is shown below:

    = Current year dividend : price + Growth rate

    where,

    The current dividend would be

    = $2.21 + $2.21 * 5%

    = $2.21 + $0.1105

    = $2.3205

    The other things would remain the same

    So, the cost of common equity would be

    = $2.3205 : $55 + 5%

    = 0.04219 + 0.05

    = 9.22%
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