Last week, lester's electronics paid an annual dividend of $2.00 on its common stock. the company has a longstanding policy of increasing its dividend by 6.0 percent annually. this policy is expected to continue. what is the firm's cost of equity if the stock is currently selling for $42.15 a share?

Question

Myles Ayala

Business

10 November, 08:55

Last week, lester's electronics paid an annual dividend of $2.00 on its common stock. the company has a longstanding policy of increasing its dividend by 6.0 percent annually. this policy is expected to continue. what is the firm's cost of equity if the stock is currently selling for $42.15 a share?

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Ana Lewis · Answer 1

Cost of equity = D1/P0 + g as per the Dividend distribution model (DDM)

Cost of equity = D0 * (1+g) / P0 + g

Cost of equity = 2.00 * (1+0.06) / 42.15 + 0.06 = 2 * (1.06) / 452.15 + 0.06 = 0.1103 = 11.03%

Cost of equity = 11.03%