Anle Corporation has a current stock price of $ 23.65 and is expected to pay a dividend of $ 1.00 in one year. Its expected stock price right after paying that dividend is $ 25.86. a. What is Anle's equity cost of capital? b. How much of Anle's equity cost of capital is expected to be satisfied by dividend yield and how much by capital gain?

Answer and Explanation:

According to the scenario, computation of the given data are as follow:-

We can calculate the Anle's equity cost of capital by using following formula:-

Equity Cost of Capital is

= (Expected Dividend + Stock Price Right After Paying Dividend - Current Stock Price) : Current Stock Price

= ($1 + $25.86 - $23.65) : $23.65

= $3.21 : $23.65

= 0.1357

= 13.57%

Now

Dividend Yield = Expected Dividend : Current Stock Price

= $1 : $23.65

= 0.0423

= 4.23%

Capital Gain = (Stock Price Right after Paying Dividend - Current Stock Price) : Current Stock Price

= ($25.86 - $23.65) : $23.65

= $2.21 : $23.65

= 0.0934

= 9.34%