The cost of equity: Rubber Chicken Ltd was paid a dividend of $1.87 last year. If the company's growth in dividends is expected to be 10 percent next year and then zero thereafter, then what is the cost of equity capital for Rubber Chicken if the price of its ordinary shares is currently $25.71?

Question

Quizplus · Accepted Answer

To calculate cost of equity (Ke), we can use the dividend discount model (DDM) as follows:
Ke = (D1 / P0) + g
Where:
D1 = Next year's expected dividend = $1.87 x 1.1 = $2.057
P0 = Current share price = $25.71
g = Expected growth rate = 10%
Ke = ($2.057 / $25.71) + 0.1 = 0.080 or 8.00%
Therefore, the cost of equity capital for Rubber Chicken is 8.00%.

The Cost of Equity: Rubber Chicken Ltd Was Paid a Dividend