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23 November, 13:45

Krell Industries has a share price of $ 22.77 today. If Krell is expected to pay a dividend of $ 1.09 this year and its stock price is expected to grow to $ 24.33 at the end of the year, what is Krell's dividend yield and equity cost of capital?

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  1. 23 November, 15:05
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    Dividend yield is 4.79%

    Cost of equity is 11.64%

    Explanation:

    The dividend yield on Krell Industries share price is the dividend of $1.09 divided by the price of the share today of $22.77

    dividend yield=$1.09/$22.77=4.79%

    The equity cost of capital can be calculated from the share price formula given below by changing the subject of the formula to cost of equity, r.

    stock price=Do * (1+g) / r-g

    Do is the dividend paid this year of $1.09

    g is the dividend growth of dividend which is computed thus:

    g=share price at end of the year-share price now/share price now

    g = ($24.33-$22.77) / $22.77=6.85%

    r is the unknown

    stock price is $24.33

    24.33=1.09 * (1+6.85%) / (r-6.85%)

    24.33=1.164665 / r-6.85%

    r = (1.164665 / 24.33) + 6.85%

    r=11.64%
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