An all-equity firm produced a dividend flow of $20,000 last year.The market value of the firm is $650,000 and the dividend is expected to increase at 4% each year.What is the cost of equity capital for this firm?

Question

Quizplus · Accepted Answer

The cost of equity capital can be calculated using the Gordon Growth Model: Cost of Equity = (Dividend / Market Value) + Growth Rate. Here, Cost of Equity = ($20,000 / $650,000) + 0.04 = 0.072 or 7.2%.

An All-Equity Firm Produced a Dividend Flow of $20,000 Last