Question

The Tribiani Company just issued a dividend of $2.90 per share on its common stock. The company is expected to maintain a constant 6 percent growth rate in its dividends indefinitely. If the stock sells for $58 a share, what is the company's cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

The cost of equity for the Tribiani Company is 11%, calculated using the Dividend Discount Model with the given dividend of $2.90, growth rate of 6%, and stock price of $58.

Step-by-step explanation:

The cost of equity for the Tribiani Company can be computed using the Dividend Discount Model (also known as the Gordon Growth Model), which assumes that dividends will continue to grow at a constant rate indefinitely. To apply the model, we use the formula:

Cost of Equity = (Dividends per Share / Current Stock Price) + Growth Rate of Dividends

Given the dividend of $2.90 per share, a constant growth rate of 6%, and the current stock price of $58, the cost of equity calculation would be as follows:
Cost of Equity = ($2.90 / $58) + 0.06 = 0.05 + 0.06 = 0.11 or 11%

Therefore, the company's cost of equity is 11%.