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Sedbober
1 month ago
5

Clancy's just paid its annual dividend of $1.48 per share. Analysts expect the stock price to increase by 2.1 percent annually a

nd value the stock at $14.65 per share currently. What is the cost of equity for this firm
Business
1 answer:
soldi70 [3.1K]1 month ago
8 0

Answer:

Cost of equity = 13.6%

Explanation:

We will determine the cost of equity using the dividend valuation model, which asserts that a stock’s value is the present value of future dividends adjusted for the cost of equity.

Here’s the model:

P = D × (1 + g) / (r - g)

P represents the stock price, D is the current dividend, g denotes the dividend growth rate, and r indicates the cost of equity.

Thus, we can replace the variables with the given numbers:

14.65 = 1.48 × (1 + r) / (r - 0.021)

Cross-multiplying gives us:

(r - 0.021) × 14.65 = 1.48 × (1 + r)

14.65r - 0.30765 = 1.48 + 1.48r

By combining like terms:

14.65r - 1.48r = 1.48 + 0.30765

13.17r = 1.78765

Dividing both sides by 13.17 yields:

r = 1.78765 / 13.17 = 0.135

r = 0.135 × 100 = 13.6

Cost of equity = 13.6%

=0.135736522

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