Oracle currently pays $.76 per year of dividends and is valued at $48.30 Dividen

Question

Oracle currently pays $.76 per year of dividends and is valued at $48.30 Dividends have been growing at 25% per year for the last 4 years. It is expected to continue to grow at 20% for 4 more years then level off at 3%. What is Oracle's cost of equity based on the dividend growth model? Oracle currently pays $.76 per year of dividends and is valued at $48.30 Dividends have been growing at 25% per year for the last 4 years. It is expected to continue to grow at 20% for 4 more years then level off at 3%. What is Oracle's cost of equity based on the dividend growth model?

Explanation / Answer

48.30=(0.76*1.20^1)/(1+r)^1+(0.76*1.20^2)/(1+r)^2+(0.76*1.20^3)/(1+r)^3+(0.76*1.20^4)/(1+r)^4+((0.76*1.20^4*1.03)/(r-3%))/(1+r)^4

use hit and trial method to find the value of r where right side of above equation is equal to the 48.30 as price

the answer is r=5.92% which is the cost of equity

the above is the answer

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