Gremlin Industries will pay a dividend of $1.80 per share this year. It is expected that this dividend will grow by 4% per year each year in the future. The current price of a Gremlin share is $22.40. What is Gremlin's equity cost of capital?

Question

Quizplus · Accepted Answer

To calculate the equity cost of capital using the dividend growth model, we can use the formula:

Equity Cost of Capital = (Dividend / Price) + Growth Rate

Dividend = $1.80
Price = $22.40
Growth Rate = 4%

Therefore, Equity Cost of Capital = (1.80 / 22.40) + 0.04 = 0.1205 or 12.05%

So the correct answer is D) 12%.

Gremlin Industries Will Pay a Dividend of $1