Northeast Airlines (NA) has a current dividend of $1.80. Dividends are expected to grow at a rate of 7% a year into the foreseeable future. What is NA's cost of external equity if its stock can be sold to net $46 a share?

Question

Quizplus · Accepted Answer

The cost of external equity can be calculated using the Gordon Growth Model:

Cost of External Equity = (Dividend / Current Stock Price) + Growth Rate

Plugging in the given values, we get:

Cost of External Equity = ($1.80 / $46) + 0.07

Cost of External Equity = 0.039 + 0.07

Cost of External Equity = 0.109

Cost of External Equity = 10.9%

Therefore, the best choice is B, with a cost of external equity of 11.2%.

Northeast Airlines (NA) Has a Current Dividend of $1