Question

1. Pegasus Tours plans to pay a dividend of $1.80 next year, and they anticipate that dividend payments will grow by 3.5% every year for the foreseeable future. The market price of the stock is $27.90.  The company's expected rate of return or cost of equity is closest to:

   		10.20%.
   		14.94%.
   		26.89%.

Answer 1

Based on the constant dividend growth model-

where, Po is the current market price.
D1 = Dividend to be paid next year.
g = Growth rate
Ke = cost of equity

Here,

Po = $27.90 , D1 = $1.80 and g = 3.5%

Putting the values in the formula-

27.90 ( Ke - 0.035) = 1.80

27.90Ke - 0.9765 = 1.80

27.90Ke = 1.80 + 0.9765

27.90Ke = 2.7765

Ke = 2.7765 / 27.90

= 0.099516129

Ke = 9.952 %

Cost of equity =  9.952 %

The company's expected rate of return or cost of equity is closest to - 10.20%

Hope it helps !