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Fallax Corp. common stock is currently priced at $43.50 per share in the open market. Analysts expect Fallax to offer $1.75 per share in dividends at the end of next year, which is projected to grow at 5.2% indefinitely. What is Fallax’s cost of internal common equity?

Sagot :

Parrain

Based on the stock price, dividend and growth rate, the cost of internal equity is 9.22%

One can find out the price of a stock by using the Gordon Growth Model which is:

Price = Net dividend / (Cost of equity - growth rate)

We can therefore find the cost of equity by solving for it:

43.50 = 1.75 / (Cost - 5.2%)

(Cost - 5.2%) x 43.50 = 1.75

(Cost - 5.2%) = 1.75 / 43.50

Cost = (1.75 / 43.50) + 5.2%

= 9.22%

In conclusion, the cost of equity is 9.22%

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