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The Down and Out Co. just issued a dividend of $1.94 per share on its common stock. The company is expected to maintain a constant 0.04 growth rate in its dividends indefinitely. If the stock sells for $42.35 a share, what is the company's cost of equity

Respuesta :

Answer:

Cost of equity will be equal to 0.76 %

Explanation:

We have given dividend just paid [tex]D_0=$1.94[/tex]

Growth rate = 0.04

So expected dividend for the next year [tex]D_1=1.84(1+0.04)=$2.017[/tex]

Stock price [tex]p_0=$42.35[/tex]

We have to find company cost of equity , that is required rate of return

We know that stock price is given by

[tex]p_0=\frac{D_1}{R_E-g}[/tex]

So [tex]42.35=\frac{2.017}{R_E-0.04}[/tex]

[tex]42.35R_E-1.694=2.017[/tex]

[tex]R_E=0.00762[/tex] = 0.76 %

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