LR Engines stock is selling for $42.39 a share,has an ROE of 14.3 percent,and a dividend payout ratio of 35 percent.The next expected dividend is $1.62 a share.What is the cost of equity for this firm?

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 next expected dividend, P0 is the current stock price, and g is the growth rate. The growth rate (g) can be calculated as ROE * (1 - payout ratio). Here, g = 14.3% * (1 - 0.35) = 9.295%. Thus, Cost of Equity = ($1.62 / $42.39) + 9.295% = 13.12%.

LR Engines Stock Is Selling for $42