Question

Mavs Inc. wishes to determine its cost of common stock equity, rs. The market price, P0, of its common stock is $42.41 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

Market Price of Common Stock(P0) = $42.41

Dividend expected to be paid (D1) = $4.20

Calculating the Growth rate of Dividend over past 6 years:-

Growth rate = (Present Dividend/Past Dividend)^(1/n) - 1

Present Dividend = $4.10

Past Dividend = $3.60

n = 6 years

Growth rate = ($4.10/$3.60)^(1/6) - 1

= 1.0219121 -1

= 2.1912%

Now, Calculating the Cost of Common Equity Financing:-

Ke = 12.09%

So, the cost of common stock equity financing is 12.09%