Gremlin Industries will pay a dividend of $1.80 per share at the end of this year.It is expected that this dividend will grow by 4% per year each year in the future.The current price of Gremlin's stock is $22.40 per share.What is Gremlin's equity cost of capital?

Question

Quizplus · Accepted Answer

The equity cost of capital can be calculated using the Gordon Growth Model (Dividend Discount Model): Cost of Equity = (Dividend per share / Current stock price) + Growth rate = ($1.80 / $22.40) + 0.04 = 0.08 + 0.04 = 0.12 or 12%.

Gremlin Industries Will Pay a Dividend of $1