ummerdahl Resort's common stock is currently trading at $23 a share. The stock is expected to pay a dividend of $2.00 a share at the end of the year (D1 = $2.00), and the dividend is expected to grow at a constant rate of 4% a year. What is the cost of common equity?

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Summerdahl Resort's common stock is currently trading at $23 a share. The stock is expected to pay a dividend of $2.00 a share at the end of the year (D1 = $2.00), and the dividend is expected to grow at a constant rate of 4% a year. What is the cost of common equity?

Expert Solution
Step 1 - Introdction

We will use the below formula to calculate the cost of common equity

 

Cost of common equity = (D1/P0)+G

Where

D1- Expected dividend i.e. $2.00

P0 - Current price of stock i.e. $23

G - Dividend growth rate i.e. 4% 

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