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24 August, 10:47

Sweet Treats common stock is currently priced at $36.72 a share. The company just paid $2.18 per share as its annual dividend. The dividends have been increasing by 2.2 percent annually and are expected to continue doing the same. What is the cost of equity

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  1. 24 August, 11:15
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    Cost of equity = 8.0%

    Explanation:

    Cost of equity can be ascertained using the dividend valuation model. The model states that the price of a stock is the present value of future dividends discounted at the required rate of return.

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

    g - 2.2%, P - 36.72, D - 2.18

    Ke = (2.18 * (1+0.022)) / 38.72 + 0.022) * 100

    = 0.07954 * 100

    = 8.0%

    Cost of equity = 8.0%
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