An all-equity firm produced a dividend flow of $30,000 last year.The market value of the firm is $875,000 and the dividend is expected to increase at 3% each year.What is the cost of equity capital for this firm?
A)6.53%
B)6.91%
C)7.45%
D)7.89%
E)8.17%

Question

Quizplus · Accepted Answer

The cost of equity capital can be calculated using the Gordon Growth Model (Dividend Discount Model): Cost of Equity = (Dividend/Market Value) + Growth Rate. Here, Cost of Equity = ($30,000/$875,000) + 3% = 6.53%.

An All-Equity Firm Produced a Dividend Flow of $30,000 Last