What is the cost of equity for Fat Rat Laboratories, Inc.? The stock has the following dividends, the stock sells for $70 with flotation costs of $6 and it expects to pay a dividend of $3.20 next year (rounded).
$$\begin{array} { | c | c | }
\hline \text { YEARE } & \text { DIVIDENDS } \
\hline 2014 & \mathbf { 2 . 9 4 } \
\hline 2013 & 2.70 \
\hline 2012 & 2.49 \
\hline 2011 & 2.29 \
\hline
\end{array}$$

Question

What is the cost of equity for Fat Rat Laboratories, Inc.? The stock has the following dividends, the stock sells for $70 with flotation costs of $6 and it expects to pay a dividend of $3.20 next year (rounded).
$$\begin{array} { | c | c | } 
\hline \text { YEARE } & \text { DIVIDENDS } \
\hline 2014 & \mathbf { 2 . 9 4 } \
\hline 2013 & 2.70 \
\hline 2012 & 2.49 \
\hline 2011 & 2.29 \
\hline
\end{array}$$

Quizplus · Accepted Answer

The cost of equity is the required return on equity, which is the rate of return that investors require to invest in the stock. It can be calculated using the dividend discount model (DDM), which is:Cost of equity = (Dividend / Stock price) + Growth rateThe dividend is the expected dividend for next year, which is $3.20. The stock price is $70. The growth rate is the expected growth rate of dividends, which can be calculated using the historical growth rate of dividends. The historical growth rate of dividends is (3.20 / 2.94) - 1 = 8.84%.Therefore, the cost of equity is:Cost of equity = (3.20 / 70) + 0.0884 = 14.00%

What Is the Cost of Equity for Fat Rat Laboratories