Garwood Garages will pay a dividend of $2.55 next year,and expects its dividends to grow at 3% per year.The current price of Garwood stock is $18.25 per share.What is Garwood's cost of equity?

Question

Quizplus · Accepted Answer

The cost of equity can be calculated using the dividend discount model (DDM) formula for a perpetuity, which is: Cost of Equity = (Dividend per Share / Current Price per Share) + Growth Rate. Plugging in the given values: Cost of Equity = ($2.55 / $18.25) + 3% = 0.1397 + 0.03 = 0.1697 or 16.97%, which rounds to 17%.

Garwood Garages Will Pay a Dividend of $2