The Drogon Co. just issued a dividend of $2.21 per share on its common stock. The company is expected to maintain a constant 5 percent growth rate in its dividends indefinitely. If the stock sells for $55 a share, what is the company's cost of equity?

Question

Sheldon Alexander

Business

31 January, 16:40

The Drogon Co. just issued a dividend of $2.21 per share on its common stock. The company is expected to maintain a constant 5 percent growth rate in its dividends indefinitely. If the stock sells for $55 a share, what is the company's cost of equity?

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Answers (1)

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Armando Weber · Answer 1

9.22%

Explanation:

The formula to compute the cost of common equity under the DCF method is shown below:

= Current year dividend : price + Growth rate

where,

The current dividend would be

= $2.21 + $2.21 * 5%

= $2.21 + $0.1105

= $2.3205

The other things would remain the same

So, the cost of common equity would be

= $2.3205 : $55 + 5%

= 0.04219 + 0.05

= 9.22%