The cost of equity: The Dedus Shoes, Inc., has common shares with a price of $28.76 per share. The firm paid a dividend of $1.00 yesterday, and dividends are expected to grow at 10 percent for two years and then at 5 percent thereafter. What is the implied cost of common equity capital for Dedus?

Question

Quizplus · Accepted Answer

The cost of equity can be calculated using the Gordon Growth Model (Dividend Discount Model). The formula is: Cost of Equity = (D1 / P0) + g. Here, D1 is the expected dividend next year, P0 is the current stock price, and g is the growth rate. The expected dividend next year (D1) is $1.00 * 1.10 = $1.10. The growth rate after two years is 5%. Therefore, the cost of equity is ($1.10 / $28.76) + 0.05 = 0.089 or 8.9%, which rounds to 9.00%.

The Cost of Equity: the Dedus Shoes, Inc