The cost of equity: Oasis Ltd has common shares with a price of $21.12 per share. The company is expected to pay a dividend of $1.75 one year from today, and dividends are expected to grow at 10 percent for two years after that and then at 5 percent thereafter. What is the implied cost of ordinary shares for Oasis?

Question

Quizplus · Accepted Answer

First, we need to calculate the expected dividends for the next three years:

- Year 1: $1.75
- Year 2: $1.75 x 1.1 = $1.925
- Year 3: $1.925 x 1.1 = $2.1175

After year 3, dividends are expected to grow at a rate of 5%. We can use the Gordon growth model to calculate the cost of equity:

Cost of equity = (next year's dividend / current stock price) + growth rate

Cost of equity = ($2.1175 / $21.12) + 0.05

Cost of equity = 0.1 or 10%

Therefore, the best answer is B) 14%.

The Cost of Equity: Oasis Ltd Has Common Shares with a Price