Page 311 - FM Integrated WorkBook STUDENT 2018-19

The cost of capital

Question 4

DVM with growth

Gorman Co expects to pay out a dividend next year of 50 cents. Its current
share price is $5.20 and it expects annual dividends to grow after next year’s
payment at a constant rate of 2%.

Calculate the cost of equity using the dividend valuation model.

Ke = [D 1/P 0] + g

Ke = [$0.50/$5.20] + 0.02 = 0.116 or 11.6%

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