Question

Montez Supply is expected to pay an annual dividend of $.95 per share next year. The market price of the stock is $43.50 and the growth rate is 4.5 percent. What is the cost of equity

Answer 1

Based on the annual dividend, the growth rate, and the market price, the cost of equity is 6.68%

What is the cost of equity?

This can be found as:

Market price = Next dividend / (Cost of equity - growth rate)

Solving gives:

43.50 = 0.95 / (Cost - 4.5%)

Cost - 4.5% = 0.95 / 43.50

Cost = 2.18% + 4.5%

= 6.68%

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