The common stock of QRS Corp is currently selling for $99. It just paid an annual dividend of $5, and the dividend has been growing at a constant rate of 4%. Using the dividend growth model, what is the cost of equity for QRS's stock?

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Multiple Choice

The common stock of QRS Corp is currently selling for $99. It just paid an annual dividend of $5, and the dividend has been growing at a constant rate of 4%. Using the dividend growth model, what is the cost of equity for QRS's stock?

In the dividend growth model, the cost of equity is the return investors require from the stock, calculated as D1 divided by the current price plus the growth rate: Re = D1/P0 + g. Here, the stock just paid a dividend of 5 and dividends are growing at 4% each year. The next dividend is D1 = 5 × (1 + 0.04) = 5.20. With a current price P0 of 99, Re = 5.20/99 + 0.04 ≈ 0.0525 + 0.04 = 0.0925, or about 9.25%. So the cost of equity is approximately 9.25%.

In the dividend growth model, the cost of equity is the return investors require from the stock, calculated as D1 divided by the current price plus the growth rate: Re = D1/P0 + g.

Here, the stock just paid a dividend of 5 and dividends are growing at 4% each year. The next dividend is D1 = 5 × (1 + 0.04) = 5.20. With a current price P0 of 99, Re = 5.20/99 + 0.04 ≈ 0.0525 + 0.04 = 0.0925, or about 9.25%.

So the cost of equity is approximately 9.25%.

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