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50. The most recent historical dividend (Do) paid by Hillshire Corporation was $1.50. What is
the cost of equity using the Gordon constant growth model, assuming the current market price
per
share is $25.00 and the annual growth rate is expected to be 7% for the foreseeable future?
Given Values: Dividend Historical (DD) = $1.50, Current Price (PQ) = $25.00 and Growth Rate



Answer :

GinnyAnswer
To calculate the cost of equity using the Gordon constant growth model (also known as the Dividend Discount Model), we will follow these steps: 1. Identify the variables: a. D₀ (Most recent historical dividend) = $1.50 b. P₀ (Current market price per share) = $25.00 c. g (Expected annual growth rate) = 7% or 0.07 when expressed as a decimal. 2. The formula for the cost of equity (kₑ) according to the Gordon constant growth model is: kₑ = (D₀ * (1 + g) / P₀) + g 3. Insert the given values into the formula: kₑ = ($1.50 * (1 + 0.07) / $25.00) + 0.07 4. Calculate D₀ * (1 + g): $1.50 * (1 + 0.07) = $1.50 * 1.07 = $1.605 5. Divide the result by P₀: $1.605 / $25.00 = 0.0642 6. Add the growth rate to the ratio: 0.0642 + 0.07 = 0.1342 or 13.42% Therefore, the cost of equity for Hillshire Corporation using the Gordon constant growth model is 13.42%.

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