Ames Ltd has a dividend yield of 2 percent based on the current dividend and a mature phase dividend growth rate of 5 percent per year. The current dividend growth rate is 10 percent per year, but the growth rate is expected to decline linearly to its mature phase value during the next six years. If the shares of Ames are fairly priced in the marketplace, what is the implied cost of equity of the company? 4.7% 6.3% 7.4% None of the above

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Ames Ltd has a dividend yield of 2 percent based on the current dividend and a mature phase dividend growth rate of 5 percent per year. The current dividend growth rate is 10 percent per year, but the growth rate is expected to decline linearly to its mature phase value during the next six years.

If the shares of Ames are fairly priced in the marketplace, what is the implied cost of equity of the company?

  1. 4.7%
  2. 6.3%
  3. 7.4%
  4. None of the above
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