ABC Co. is expecting to pay a dividend of $1.98 in the upcoming year and further anticipates growing the dividend at a constant rate of 3.5% per year, indefinitely. If the current share price is $25, then what is the cost of equity according to the Gordon Growth Model?

Question

Business

Barbara Copeland

8 March, 02:24

ABC Co. is expecting to pay a dividend of $1.98 in the upcoming year and further anticipates growing the dividend at a constant rate of 3.5% per year, indefinitely. If the current share price is $25, then what is the cost of equity according to the Gordon Growth Model?

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Answers (1)

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Jarrett Prince · Answer 1

0.1142 or 11.42%

Explanation:

In this question, we apply the Gordon Growth model which is presented below:

= (Current year dividend : current share price) + Growth rate

= ($1.98 : $25) + 3.5%

= 0.0792 + 0.035

= 0.1142 or 11.42%

We simply applied the above formula to find out the cost of equity by considering the current year dividend, current share price, and the growth rate