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Last week, Lester's Electronics paid an annual dividend of $2.4 on its common stock. The company has a longstanding policy of increasing its dividend by 4 percent annually. This policy is expected to continue. What is the firm's cost of equity if the stock is currently selling for $42 a share? 11.96% 8.66% 10.05% 9.94% 7.12%

Respuesta :

TomShelby

Answer:

cost of equity = 9.94%

Explanation:

we use the gordon dividend growth model to solve for cost of capital

[tex]\frac{divends_1}{return-growth} = Intrinsic \: Value[/tex]

we clear cost of capital

[tex]return = \frac{divends_1}{stock} + g [/tex]

Now, we plug the values into the formula and solve:

we have the last week dividend (t= 0)

we need the dividend of next year so we apply the grow rate

2.4 x 1.04 = 2.496

Stock 42

g = 0.04

[tex]return = \frac{2.496}{42} + 0.04 [/tex]

return = 0.099429 = 9.94%

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