Last week, lester's electronics paid an annual dividend of $2.4 on its common stock. the company has a longstanding policy of increasing its dividend by 4 percent annually. this policy is expected to continue. what is the firm's cost of equity if the stock is currently selling for $42 a share? 11.96% 8.66% 10.05% 9.94% 7.12%

cost of equity = 9.94%

Explanation:

we use the gordon dividend growth model to solve for cost of capital

we clear cost of capital

Now, we plug the values into the formula and solve:

we have the last week dividend (t= 0)

we need the dividend of next year so we apply the grow rate

2.4 x 1.04 = 2.496

Stock 42

g = 0.04

return = 0.099429 = 9.94%