Marigold Products is expected to pay a dividend of $1.98 one year from today. If the firm’s growth in dividends is expected to remain at a flat 4 percent forever, what is the cost of equity capital for Marigold if the price of its common shares is currently $33.00?
To calculate the cost of equity capital, we can use the dividend discount model (DDM) formula. The DDM calculates the present value of all future expected dividends.
The formula for the DDM is:
Cost of Equity = Dividend / Current Stock Price + Growth Rate
First, let's calculate the dividend in one year:
Dividend = $1.98
Next, we need to calculate the growth rate:
Growth Rate = 4% or 0.04
Now, we can plug these values into the formula:
Cost of Equity = $1.98 / $33.00 + 0.04
Calculating this:
Cost of Equity = 0.06 or 6%
Therefore, the cost of equity capital for Marigold is 6%.