Whitehall Camps recently paid its annual dividend of $1.42 a share.These dividends have been increasing by 2.2 percent each year and are expected to continue this trend.What is the cost of equity if the stock sells for $22.89 a share?

Question

Quizplus · Accepted Answer

The cost of equity can be calculated using the Gordon Growth Model: Cost of Equity = (D1 / P0) + g, where D1 is the expected dividend next year, P0 is the current stock price, and g is the growth rate. D1 = $1.42 * (1 + 0.022) = $1.45124. Cost of Equity = ($1.45124 / $22.89) + 0.022 = 0.0854 or 8.54%.

Whitehall Camps Recently Paid Its Annual Dividend of $1