Chelsea Fashions is expected to pay an annual dividend of $1.26 a share next year. The market price of the stock is $24.09 and the growth rate is 2.6 percent. What is the cost of equity? a. 7.83 percent
b. 7.91 percent
c. 7.54 percent
d. 9.77 percent
e. 9.24 percent

a. 7.83 percent

Explanation:

This is calculated by using the Gordon growth model (GGM) formula as follows:

P = d / (r - g) ……………………………………… (1)

Where;

P =  market price of the stock = $24.09

d = next year annual dividend = $1.26

r = cost of equity = ?

g = dividend growth rate = 2.6%, or 0.026

Substituting the values into equation and solve for r, we have:

24.09 = 1.26 / (r - 0.026)

24.09 (r - 0.026) = 1.26

24.09r - 0.62634 = 1.26

24.09r = 1.26 + 0.62634

24.09r = 1.88634

r = 1.88634 / 24.09

r = 0.0783038605230386, or 7.83038605230386%

Rounding to 2 decimal places. we have:

r = 7.83%

Therefore, the correct option is a. 7.83 percent.

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