Problem 12-1 Calculating Cost of Equity [LO 1] The Lo Tech Co. just issued a div
ID: 2719867 • Letter: P
Question
Problem 12-1 Calculating Cost of Equity [LO 1]
The Lo Tech Co. just issued a dividend of $2.50 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 $43.30 a share, what is the company’s cost of equity? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
The Lo Tech Co. just issued a dividend of $2.50 per share on its common stock. The company is expected to maintain a constant 5 percent growth rate in its dividends indefinitely.
Explanation / Answer
Current Dividend = $2.50
Growth = 5%
Expected dividend (D1)= $2.50+ (2.50*0.05)
Cost of equity (Ke) =[( D1 / P0) + g]*100
=[ (2.625/43.30) + 0.05]*100
= 11.06%
Where D1= expected dividend
P0 = Current market price
g= growth rate