Question

ABC Co. is expecting to pay a dividend of $1.98 in the upcoming year and further anticipates growing the dividend at a constant rate of 3.5% per year, indefinitely. If the current share price is $25, then what is the cost of equity according to the Gordon Growth Model?

Answer 1

0.1142 or 11.42%

Step-by-step explanation:

In this question, we apply the Gordon Growth model which is presented below:

= (Current year dividend ÷ current share price) + Growth rate

= ($1.98 ÷ $25) + 3.5%

= 0.0792 + 0.035

= 0.1142 or 11.42%

We simply applied the above formula to find out the cost of equity by considering the current year dividend, current share price ,and the growth rate