Question

ABC Corp. has a stock price P0 = 50. The firm has just paid a dividend of $3 per share, and intelligent shareholders think that this dividend will grow by a rate of 5% per year. Use the Gordon dividend model to calculate the cost of equity of ABC.

Answer 1

Ke 0.118

Step-by-step explanation:

Given the gordon moel formula we clear for Ke and solve:

`(divends)/(return-growth) = Intrinsic \: Value`

`(divends)/(Price) = return-growth`

`(divends)/(Price) + growth = return`

`$Cost of Equity =(D_1)/(P) +g`

D1 3.15

P 50

f 0.00

g 0.055

`$Cost of Equity =(3.15)/(50(1-0)) +0.055`

Ke 0.118