Sheepdog Rescue just paid its first annual dividend of $1.95 a share.The firm plans to increase the dividend by 1.75 percent per year indefinitely.What is the firm's cost of equity if the current stock price is $31.45 per share?

Question

Quizplus · Accepted Answer

The cost of equity can be calculated using the Gordon Growth Model (Dividend Discount Model): Cost of Equity = (D1 / P0) + g, where D1 is the dividend next year, P0 is the current stock price, and g is the growth rate. D1 = $1.95 * (1 + 0.0175) = $1.984125. Cost of Equity = ($1.984125 / $31.45) + 0.0175 = 0.0806 or 8.06 percent.

Sheepdog Rescue Just Paid Its First Annual Dividend of $1