Please show the math and formulas for me. The Down and Out Co. just issued a div
ID: 2645808 • Letter: P
Question
Please show the math and formulas for me.
The Down and Out Co. just issued a dividend of $2.46 per share on its common stock. The company is expected to maintain a constant 4 percent growth rate in its dividends indefinitely. If the stock sells for $30 a share, what is the company's cost of equity? (Do not round your intermediate calculations.)
Hint: In chapter 8 we calculated the stock price as the present value of future dividends. This is a constant growth stock, and you know the price, the last dividend paid, and the growth rate in the dividend. Simply calculate the next dividend to be paid and back-out the required return (discount rate) on the stock.
Explanation / Answer
Dividend Paid, D0 2.46 Growth rate, g 4% Dividend 1 year from now, D1 = 2.46(104%) 2.5584 Price,P0 30.00 Ke = D1/P0 +g ke = 2.55584/30 + 4% ke = 8.528% + 4% ke = 12.528%