Question
Asked Nov 7, 2019
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Gremlin Industries will pay a dividend of $1.65 per share this year. It is expected that this dividend will grow by 5% per year each year in the future. The current price of​ Gremlin's stock is $22.20 per share. What is​ Gremlin's equity cost of​ capital?

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Expert Answer

Step 1

In the question, the value of the dividend to be paid, the growth rate and the stock price are given. We can determine the value of the cost of capital using the formula below:

Step 2
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Stock price (Next dividend) (Cost of capital Growth rate) Now, substituting the values, we get;

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Step 3
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22.2 (1.65) (Cost of capital-5%) (Cost of capital-5%) = (1.65) 22.2 =>Cost of capital-0.074324324+5% >Cost of capital-0.124324324 or 12.43% (Rounded to two decimal places)

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