Question

I need help with this study note question.

What is the cost of equity of a company whose shares are trading at 30.2 and which pays a dividend of 5 over five years and 6 after five years?

Our notes give the solution which is 18.00% but I don't understand how that answer reached. Can you please provide step by step on how

that answer was reached.

thank you

Answer 1

These types are questions are done using trial and error method as shown below

price of the stock=30.2

5/(1+r)^1+5/(1+r)^2+5/(1+r)^3+5/(1+r)^4+5/(1+r)^5+(6/r)/(1+r)^5=30.2

5*((1-(1+r)^(-5))/r)+(6/r)/(1+r)^5=30.2

use trial and error method

try various values of r so that both sides are equal

after trying many times, i get r=18.00%, so answer is 18.00%

the above is answer..