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%.