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Inc. Has paid annual dividends of $.58, $.66, $.72, and $.75 per share over the last four years, respectively. The stock is currently selling for $10.08 a share. Using the dividend growth model, what is the company's cost of equity?

Respuesta :

jepessoa

Answer:

Re = 17.08%

Explanation:

first we must determine the dividend's growth rate (g). I will use the geometric growth rate:

growth rate year 1 = (.66 - .58) / .58 = 13.79%

growth rate year 2 = (.72 - .66) / .66 = 9.09%

growth rate year 3 = (.75 - .72) / .72 = 4.17%

geometric growth rate = ∛(1.1379 x 1.0909 x 1.0417) - 1 = 1.0895 - 1 = 0.0895 = 8.95%

next year's dividend = $0.75 x 1.0895 = $0.82

$10.08 = $0.82 / (Re - 8.95%)

Re - 8.95%= $0.82 / $10.08 = 8.13%

Re = 17.08%

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