Price at t= 0 "P0" = D1 / (r - g)
D1 = D0 * (1 + g in decimal form)
D1 = 2.60*1.04 = 2.704
P0 = D1 / (r - g)
44.40 = 2.704 / r - 0.04
2.704 / 44.40 = r - 0.04
0.0609 = r - 0.04
r = 0.1009, or 10.09%
9.86%
The Lo Tech Co. just issued a dividend of $2.60 per share on its common stock. The company is expected to maintain a constant 4 percent growth rate in its dividends indefinitely.
Required:
If the stock sells for $44.40 a share, what is the company’s cost of equity?
