The Drogon Co. just issued a dividend of $2.80 per share on its common stock. The company is expected to maintain a constant 4.5 percent growth rate in its dividends indefinitely. If the stock sells for $58 a share, what is the company's cost of equity?

9.54%

Explanation:

The computation of the company cost of equity is shown below:

The cost of equity = (Next year dividend : price) + Growth rate

where,

Next year dividend is

= $2.80 + $2.80 * 4.5%

= $2.80 + $0.126

= $2.926

And the price is $58 per share

And, the growth rate is 4.5%

So, the cost of equity is

= ($2.926 : $58) + 4.5%

= 9.54%