Clancy's just paid its annual dividend of $1.48 per share. Analysts expect the stock price to increase by 2.1 percent annually and value the stock at $14.65 per share currently. What is the cost of equity for this firm

Cost of equity = 13.6%

Explanation:

We will work out the cost of equity, using the the dividend valuation model. The model states that the value of a stock is the present value of the future divided discounted at the cost of equity.

The model is given below:

P = D * (1+g) / (r-g)

P - price of stock, D - dividend payable now, g - growth rate in dividend, r - cost of equity

So we substitute

14.65 = 1.48 * (1+r) / (r-0.021)

cross multiplying

(r-0.021) * 14.65 = 1.48 * (1+r)

14.65r - 0.30765 = 1.48 + 1.48r

collecting like terms

14.65r - 1.48r = 1.48 + 0.30765

13.17 r = 1.78765

Divide both sides by 13.17

r = 1.78 / 13.17 = 0.135

r=0.135 * 100 = 13.6

Cost of equity = 13.6%

=0.135736522