Cost of Common Equity and Rate of Return
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ABC's common stock is currently trading at $36 a share. The stock is expected to pay a dividend of $3.00 per share at the end of the year and the dividend is expected to grow at a constant rate of 5 percent per year. What is the cost of common equity? What is the required rate of return?
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Solution Summary
This solution provides a brief, but concise response which illustrates how the dividend discount model can be implemented to calculate the cost of equity and the required rate of return. All steps are shown, along with the necessary calculations.
Solution Preview
We will use the dividend discount model
Po= Div1/ (r-g)
Dividend for next year = ...
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