Question

Krell Industries has a share price of $20.50 today. If Krell is expected to pay a dividend of $1.00 this year, and its stock price is expected to grow to $25 at the end of the year, what is Krell's dividend yield and equity cost of capital?

(a) Krell's dividend yield is Answer%. (Round to two decimal places.)

(b) Krell's equity cost of capital is Answer%. (Round to two decimal places.)

Answer 1

a. The dividend yield is computed as shown below:

= Expected dividend / current share price

= $ 1 / $ 20.50

= 4.88% Approximately

b. The cost of capital is computed as shown below:

current stock price = (dividend expected + stock price at the end of the year) / (1 + cost of capital)

$ 20.50 = ($ 1 + $ 25) / (1 + cost of capital)

1 + cost of capital = $ 26 / $ 20.50

cost of capital = 26.83% Approximately

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