An all-equity firm produced a dividend flow of $30,000 last year.The market value of the firm is $875,000 and the dividend is expected to increase at 3% each year.What is the cost of equity capital for this firm?

Question

Quizplus · Accepted Answer

The cost of equity capital is the rate of return that investors require to invest in a company's stock. It is calculated as the dividend yield plus the expected growth rate of the dividend. In this case, the dividend yield is $30,000/$875,000 = 3.43%. The expected growth rate of the dividend is 3%. Therefore, the cost of equity capital is 3.43% + 3% = 6.43%.

An All-Equity Firm Produced a Dividend Flow of $30,000 Last