Countess Corp. is expected to pay an annual dividend of $4.57 on its common stock in one year. The current stock price is $73.59 per share. The company announced that it will increase its dividend by 3.70 percent annually. What is the company's cost of equity

The company's cost of equity is 9.91%

Explanation:

The cost of Equity is the investor's required return and according to the given information D1 = $4.57, SP = $73.59, g = 3.70% The DDM model which derives the current price of the stock by discounting it future dividends will be used in this calculation

SP = D1 / r - g

73.59 = 4.57/r - 3.70%

73.59 * (r-3.70%) = 4.57

73.59 * (r-3.70%) / 73.59=4.57/73.59

r - 3.70% = 4.57/73.59

r = 4.57/73.59 + 3.70

r = 0.0991/9.91%

The cost of equity is 9.91%

Explanation:

The constant growth model of the DDM is used to calculate the price of the share or the fair value per share based on a constant growth in dividends and the required rate of return which is also known as cost of equity.

Plugging in the available values in the formual we can calculate the cost of equity or the required rate of return.

73.59 = 4.57 / (r - 0.037)

73.59 * (r - 0.037) = 4.57

73.59r - 2.72283 = 4.57

73.59r = 4.57 + 2.72283

r = 7.29283 / 73.59

r = 0.0991 or 9.91%