Question

Alderaan Incorporated has just paid a dividend of $3.27. The firm's current price on common stock is $51.35. Dividends are expected to grow at a 4% constant rate. What is the firm's cost of common equity? Give your answer as a percentage, rounded to two decimal places

Answer 1

The cost of common equity for Alderaan Incorporated is 6.37%.

Step-by-step explanation:

To calculate the cost of common equity, we can use the Dividend Discount Model (DDM) formula:

Cost of Common Equity = Dividend / Price of Stock + Growth Rate

Given that the dividend is $3.27, the price of the stock is $51.35, and the growth rate is 4%, we can plug these values into the formula:

Cost of Common Equity = $3.27 / $51.35 + 0.04

Calculating this expression, we get:

Cost of Common Equity = 0.0637 or 6.37%