Jetson Industries has a share price of $21.83 today. If Jetson is expected to pay a dividend of $0.97 this year and its share price is expected to grow to $23.02 at the end of the year, what is Jetson's dividend yield and equity cost of capital?
Question
Jetson Industries has a share price of 0.97 this year and its share price is expected to grow to $23.02 at the end of the year, what is Jetson's dividend yield and equity cost of capital?
Solution
To calculate Jetson's dividend yield and equity cost of capital, we need to follow these steps:
- Dividend Yield Calculation: Dividend yield is calculated by dividing the annual dividend payment by the market price per share.
Dividend Yield = Annual Dividend / Price per Share
So, in this case, the dividend yield would be:
Dividend Yield = 21.83 = 0.0444 or 4.44%
- Equity Cost of Capital Calculation: The equity cost of capital is calculated by adding the dividend yield to the growth rate of the share price.
Equity Cost of Capital = Dividend Yield + Growth Rate
The growth rate can be calculated by subtracting the initial share price from the final share price, and then dividing by the initial share price.
Growth Rate = (Final Share Price - Initial Share Price) / Initial Share Price
So, in this case, the growth rate would be:
Growth Rate = (21.83) / $21.83 = 0.0545 or 5.45%
Therefore, the equity cost of capital would be:
Equity Cost of Capital = 4.44% + 5.45% = 9.89%
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