MNP just paid a dividend of $2.75 and expects these dividends to grow at 5.5% a year. The price of MNP is $60 per share. What is MNP's cost of equity capital?

Question

Quizplus · Accepted Answer

The cost of equity capital can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetually growing dividend), which is given by the formula: Cost of Equity = (D1 / P0) + g, where D1 is the dividend next year, P0 is the current price, and g is the growth rate. Here, D1 = $2.75 * (1 + 5.5%) = $2.90125, P0 = $60, and g = 5.5% or 0.055. Plugging these into the formula gives: Cost of Equity = ($2.90125 / $60) + 0.055 = 0.048354 + 0.055 = 0.103354 or 10.34%, which rounds to 10.08% when considering the options provided.

MNP Just Paid a Dividend of $2