Question

Anle Corporation has a current stock price of $ 16.41 and is expected to pay a dividend of $ 0.75 in one year. Its expected stock price right after paying that dividend is $ 18.37. a. What is​ Anle's equity cost of​ capital? b. How much of​ Anle's equity cost of capital is expected to be satisfied by dividend yield and how much by capital​ gain?

Answer 1

a. Equity cost of​ capital = [(D₁ + P₁) / P₀] - 1

Equity cost of​ capital = [($0.75 + $18.37) / $16.41] - 1

Equity cost of​ capital = 0.1651 or 16.51%

b. Dividend yield = D₁ / P₀

Dividend yield = $0.75 / $16.41

Dividend yield = 0.0457 or 4.57%

c. Capital gain = (P₁ - P₀) / P₀

Capital gain = ($18.37 - $16.41) / $16.41

Capital gain = 0.1194 or 11.94%