Galena Corporation Cost of Equity Calculation
How can we calculate Galena Corporation's cost of equity?
A. 3.9%
B. 13.3%
C. 10.1%
D. 5.2%
Answer:
Galena Corporation's cost of equity is 13%, which corresponds to B. 13.3%.
To calculate Galena Corporation's cost of equity using the discounted dividend approach, we can use the Gordon Growth Model. The formula for the cost of equity is as follows:
Cost of Equity = Dividend / Stock Price + Dividend Growth Rate
Given data:
Dividend = $2
Stock Price = $20
Dividend Growth Rate = 3%
Plugging in the values into the formula:
Cost of Equity = $2 / $20 + 3%
Cost of Equity = 0.1 + 0.03
Cost of Equity = 0.13 or 13%.
By using the discounted dividend approach, we can determine that the cost of equity for Galena Corporation is 13%.