Question

Hank Corp.'s common stock currently sells for $24 per share. The most recent dividend (Do) was...

Hank Corp.'s common stock currently sells for $24 per share. The most recent dividend (Do) was $2.2, and the expected growth rate in dividends per year is 7%. The cost of common equity, Re, is ____%. Round your final answer to 2 decimal places (example: enter 12.34 for 12.34%), but do not round any intermediate work in the process.

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Answer #1

Dividend Next year = 2.2 * (1 + 0.07) = 2.354

Dividend discount model id used to find share price by discounting the entire future dividend from the stock.

Share price = Next year dividend/(Required return - dividend growth rate)

Where,

                 Share price = $24

                 Dividend = $2.354

                 Dividend growth rate = 7%

Lets put all the values in the formula to find required rate

24 = 2.354/ (X - 0.07)

24*X - 1.68 = 2.354

24*X = 2.354 + 1.68

24*X = 4.034

X = 4.034/ 24

X = 0.16808

So required rate of the stock is 16.81%

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