Oasis, Inc. has common shares with a price of $21.12 per share. The firm 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 common equity capital for Oasis? Round your final answer to nearest percentage.

Question

Quizplus · Accepted Answer

The implied cost of common equity can be calculated using the Gordon Growth Model. The expected dividends for the first three years are $1.75, $1.75*(1+0.10), and $1.75*(1+0.10)^2. After that, dividends grow at 5%. Solving for the discount rate that equates the present value of these dividends to the current share price gives approximately 14%.