An all-equity firm produced a dividend flow of $40,000 last year.The market value of the firm is $800,000 and the dividend is expected to increase at 5% each year.What is the cost of equity capital for this firm?
A)9.18%
B)9.75%
C)10.25%
D)11.89%
E)12.05%

Question

Quizplus · Accepted Answer

The cost of equity capital can be calculated using the Gordon Growth Model (Dividend Discount Model): Cost of Equity = (Dividend per share / Current market value per share) + Growth rate. Here, the dividend is $40,000, the market value is $800,000, and the growth rate is 5%. So, Cost of Equity = ($40,000 / $800,000) + 0.05 = 0.05 + 0.05 = 0.10 or 10%. The closest option is 10.25%.

An All-Equity Firm Produced a Dividend Flow of $40,000 Last