Topstone Industries is expected to pay a dividend of $2.10 per share in one year. This dividend, along with the firm's earnings, is expected to grow at a rate of 5% forever. If the current market price for a share of Topstone is $38.62, what is the cost of equity?

Question

Quizplus · Accepted Answer

The cost of equity can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetuity) formula: Cost of Equity = (Dividend per Share / Current Market Price) + Growth Rate. Plugging in the values: (2.10 / 38.62) + 0.05 = 0.0544 + 0.05 = 0.1044 or 10.44%.

Topstone Industries Is Expected to Pay a Dividend of $2