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15 November, 18:14

Johnson Enterprises's stock is currently selling for $25.67 per share, and the firm expects its per-share dividend to be $2.35 in one year. Analysts project the firm's growth rate to be constant at 5.72%. Estimating the cost of equity using the discounted cash flow (or dividend growth) approach, what is Johnson's cost of internal equity?

a. 14.87%

b. 14.13%

c. 20.07%

d. 15.61%

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Answers (1)
  1. 15 November, 18:32
    0
    a) Cost of equity = 14.78%

    Explanation:

    Cost of equity can be ascertained using the dividend valuation model. The model states that the price of a stock is the present

    Cost of equity (Ke) = (Do (1+g) / P) + g

    Ke - cost of equity, g - growth rate, p - price of the stock

    Cost of equity

    = 2.35/25.67 + 0.0572

    = 0.148746552 * 100

    = 14.87%

    Cost of equity = 14.87%
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