The Lo Tech Co. just issued a dividend of $ 2.20 per share on its common stock. The company is expected to maintain a constant 6 percent growth rate in its dividends indefinitely. If the stock sells for $ 43 a share, what is the company’s cost of equity?
To calculate the company's cost of equity, we can use the Dividend Discount Model (DDM) formula. The DDM formula is:
Cost of Equity = Dividend per Share / Current Stock Price + Growth Rate
In this case, the dividend per share is given as $ 2.20, and the current stock price is $ 43. The growth rate is mentioned as a constant 6 percent. Therefore, we can plug these values into the formula to calculate the cost of equity:
Cost of Equity = $ 2.20 / $ 43 + 0.06
First, we calculate $ 2.20 / $ 43 = 0.0512 (rounded to four decimal places).
Next, we add the growth rate to the result: 0.0512 + 0.06 = 0.1112 (rounded to four decimal places).
Therefore, the company's cost of equity is approximately 11.12%.