Gremlin Industries will pay a dividend of $ 1.55 per share this year. It is expected that this dividend will grow by 7% per year each year in the future. The current price of Gremlin's stock is $ 22.10 per share. What is Gremlin's equity cost of capital?

14%

Explanation:

We can calculate this using the Gordon Growth Model which looks like this,

P = D1 / r - g

P is the current stock price

D1 is the next dividend

r is the rate of return or the cost of capital

g is the growth rate.

We have all those figures except the cost of capital so making r the subject of the formula we can solve for it. Doing that will make the formula,

r = D/ P + g

r = 1.55 / 22.10 + 0.07

r = 0.1401

r = 14%

14% is the equity cost of capital.

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