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22 November, 11:43

Anle Corporation has a current stock price of $ 23.65 and is expected to pay a dividend of $ 1.00 in one year. Its expected stock price right after paying that dividend is $ 25.86. a. What is Anle's equity cost of capital? b. How much of Anle's equity cost of capital is expected to be satisfied by dividend yield and how much by capital gain?

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  1. 22 November, 11:52
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    Answer and Explanation:

    According to the scenario, computation of the given data are as follow:-

    We can calculate the Anle's equity cost of capital by using following formula:-

    Equity Cost of Capital is

    = (Expected Dividend + Stock Price Right After Paying Dividend - Current Stock Price) : Current Stock Price

    = ($1 + $25.86 - $23.65) : $23.65

    = $3.21 : $23.65

    = 0.1357

    = 13.57%

    Now

    Dividend Yield = Expected Dividend : Current Stock Price

    = $1 : $23.65

    = 0.0423

    = 4.23%

    Capital Gain = (Stock Price Right after Paying Dividend - Current Stock Price) : Current Stock Price

    = ($25.86 - $23.65) : $23.65

    = $2.21 : $23.65

    = 0.0934

    = 9.34%
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