Gremlin Industries will pay a dividend of $1.90 per share this year. It is expected that this dividend will grow by 4% per year each year in the future. The current price of Gremlin's stock is $23.50 per share. What is Gremlin's equity cost of capital

Given:

Po is the current stock price

= $23.5

D1 is the dividend expected for next period

= $1.9

r is the required rate of return

= cost of equity

g is the growth rate in dividend

= 4%

Cost equity, r = (D1/Po * 100) + g

Inputting values,

= 1.9/23.5 + 4

= 8.085 + 4

= 12.085%

Cost of equity capital / Required rate of return (r) = 12.085%

Explanation:

Using the constant growth dividend discount model, we plug in the values available to us and calculate the required rate of return on equity for Gremlin Industries.

The formula for constant growth dividend model is,

P0 = D1 / r - g

Where,

P0 is the price today D1 is the dividend expected for next period r is the required rate of return g is the growth rate in dividend

So,

23.5 = 1.9 / r - 0.04

23.5 (r-0.04) = 1.9

23.5r - 0.94 = 1.9

23.5r = 1.9 + 0.94

r = 2.84 / 23.5

r = 0.12085 or 12.085%