BM Beans Inc just paid 125 per share as its annual dividend

BM Beans, Inc. just paid $1.25 per share as its annual dividend. The dividends have been increasing by 2.5 percent annually and are expected to continue doing the same. BM’s common stock is currently priced at $18.00 a share. What is this firm\'s cost of equity? show all work.

Solution

As per Capital Asset Priciing Model, Cost of Equity(Ke) = (D0*(1+g)/P0)+g Where, = (1.25*(1+0.025)/18.00)+0.025 D0 Current Dividend $       1.25 = 9.62% g Growth rate 2.50% P0 Current Price $    18.00