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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.

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TomShelby

Answer:

Ke 0.118

Explanation:

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

[tex]\frac{divends}{return-growth} = Intrinsic \: Value[/tex]

[tex]\frac{divends}{Price} = return-growth[/tex]

[tex]\frac{divends}{Price} + growth = return[/tex]

[tex]$Cost of Equity =\frac{D_1}{P} +g[/tex]

D1 3.15

P 50

f 0.00

g 0.055

[tex]$Cost of Equity =\frac{3.15}{50(1-0)} +0.055[/tex]

Ke 0.118

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