Question

A company wishes to determine its cost of common stock equity, rs. The market price, P0, of its common stock is $42.64 per share. The firm expects to pay a dividend, D1, of $4.20 at the end of the coming year, 2021. The dividends paid on the outstanding stock over the past 6 years (2015–2020) were as follows: 2015- 3.60 2016- 3.65 2017-3.70 2018-3.85 2019-4.00 2020-4.10 What is the cost of common stock equity financing?

Answer 1

Growth Rate (calculated using Geomatric mean formula) NOTE : - it can also be calculated by Average Formula.

Growth Rate = ((Latest Dividend / oldest Dividend)^1/5) - 1

= ((4.10 / 3.60)^1/5) -1

= 1.02635185407 - 1

= 2.64%

Value of Stock =

42.64 =

42.64 * Rate of Return - 42.64*0.0264 = 4.20

42.64 * Rate of Return - 1.125696 = 4.20

42.64 * Rate of Return = 4.20 + 1.125696

42.64 * Rate of Return = 5.325696

Rate of Return = 5.325696 / 42.64

Rate of Return = 12.45%

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