Assume a company paid a dividend per share this year of $2.00, which is expected to grow at 4 percent per year indefinitely. If its share price is $40, what is the cost of common equity?

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Quizplus · Accepted Answer

The cost of common equity can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetually growing dividend), which is given by the formula: Cost of Equity = (Dividend per Share next year / Current Share Price) + Growth Rate. The dividend next year will be this year's dividend grown by the growth rate, which is $2.00 * (1 + 4%) = $2.08. Plugging into the formula gives: ($2.08 / $40) + 4% = 5.2% + 4% = 9.20%.

Assume a Company Paid a Dividend Per Share This Year