Cost of Internal Equity
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The stock of Alpha Tool sells for $10.25 per share. Its current dividend rate, D0, is $1 per share. Analysts and investors expect Alpha to increase its dividends at a 10 percent rate for each of the next two years. This annual dividend growth rate is expected to decline to 8 percent for years 3 and 4 and then to settle down to 4 percent per year forever. Calculate the cost of internal equity for Alpha Tool.
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Solution Summary
The solution computes the Cost of Internal Equity.
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Cost of Internal Equity = D1/P0 + g
where D1 is is the next dividend the firm will pay; P0 is the current price of a share of stock, and g is the growth rate.
Given D0 = 10 then D1 = ...
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