The shares of Hod Inc. which are currently trading at $12.50, have just paid a dividend of $1.50 per share. According to investment analysts, the historical growth rate for Hod's dividends of 2% per year is expected to continue for the foreseeable future, the firm's beta is 1.4, and the reasonable estimates for the risk-free rate and the expected market risk premium is 3% and 6%, respectively. The shares of Sol Inc. have a current market price of $10 per share and the investment analysts informed you that the stock is expected to appreciate by 5% per year for the foreseeable future, that the shares are expected to pay a dividend of $1 per share over the next year, and the firm's beta is 0.9. Which company, Hod or Sol, has the higher cost of equity?
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Calculation of Cost of equity using the dividend discount formula:
Price = ...
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