Question

IBM expects to pay a dividend of $6 next year and expects these dividends to grow at 4% a year for the foreseeable future. The price of IBM is $110 per share. What is IBM's cost of equity capital

Answer 1

Answer:

9.45%

Explanation:

Data provided in the question

Current year dividend = $6

Expected growth rate = 4%

Price of the IBM = $110

The computation of the cost of equity capital is shown below:

Cost of equity capital = Current year dividend ÷ price + Growth rate

                                    = $6 ÷ $110 + 4%

                                    = 9.45%