Answer: 14%
Explanation:
We can calculate this using the Gordon Growth Model which looks like this,
P = D1 / r - g
P is the current stock price
D1 is the next dividend
r is the rate of return or the cost of capital
g is the growth rate.
We have all those figures except the cost of capital so making r the subject of the formula we can solve for it. Doing that will make the formula,
r = D/ P + g
r = 1.55 / 22.10 + 0.07
r = 0.1401
r = 14%
14% is the equity cost of capital.
If you need any clarification do react or comment.
Answer:
Cost of capital for Gremlins is 14.01%
Explanation:
The DDM is used to value a stock by discounting the future dividends with the required return hence it will be used to calculate the required return / cost of equity
SP = D1/ r- g
SP $22.10, D1 $1.55, g 7% plug in the values
22.10 = 1.55/ r - 0.07
22.10 (r- 0.07) =1.55
22.10 (r- 0.07)/22.10 =1.55/22.10
r - 0.07 = 1.55/2.10
r = 1.55/22.10 +0.07
=0.1401
=14.01%
