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15 July, 16:22

Return to questionItem 1Item 1 Judy's Boutique just paid an annual dividend of $3.01 on its common stock. The firm increases its dividend by 3.70 percent annually. What is the company's cost of equity if the current stock price is $41.08 per share

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  1. 15 July, 16:49
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    Cost of Equity = 11.30%

    Explanation:

    Computation Cost for Equity

    Using Gordon Model

    Market Price = [Dividend * (1 + Growth Rate) ] / (Cost of Equity - Growth Rate)

    41.08 = [$3.01 * (1 + 0.037) ] / (Cost of Equity - 0.037)

    41.08 = [$3.01 * (1.037) ] / (Cost of Equity - 0.037)

    Cost of Equity - 0.037 = $3.12 / 41.08

    Cost of Equity - 0.037 = $0.076

    Cost of Equity = 0.076 + 0.037

    Cost of Equity = 0.1130

    Cost of Equity = 11.30%
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