The Down and Out Co

Finance May 06, 2021

The Down and Out Co. just issued a dividend of $1.14 per share on its common stock. The company is expected to maintain a constant 0.04 growth rate in its dividends indefinitely. If the stock sells for $23.78 a share, what is the company's cost of equity?

Enter the answer with 4 decimals (e.g. 0.1234)

Expert Solution

Computation of the company's cost of equity:-

Cost of equity = (D1 / Current stock price) + Growth rate

= ($1.14 * (1 + 0.04) / $23.78) + 0.04

= ($1.19 / $23.78) + 0.04

= 0.0499 + 0.04

= 0.0899

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