The Down and Out Co. just issued a dividend of $2.36 per share on its common sto

Question

The Down and Out Co. just issued a dividend of $2.36 per share on its common stock. The company is expected to maintain a constant 5 percent growth rate in its dividends indefinitely. If the stock sells for $35 a share, what is the company's cost of equity? (Do not round your intermediate calculations.)

The Down and Out Co. just issued a dividend of $2.36 per share on its common stock. The company is expected to maintain a constant 5 percent growth rate in its dividends indefinitely. If the stock sells for $35 a share, what is the company's cost of equity? (Do not round your intermediate calculations.)

Explanation / Answer

SOLUTION:

Using the Dividend Growth Model,

RE = [ $2.36 (1.05) / $35 ] + .05

RE = (2.478 / $35) + .05

RE = 0.0708 + .05

RE = 0.1208% or 12.08%

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