Managerial Economics 13th Edition by James McGuigan,Charles Moyer,Frederick Harris

Exercise 1

Panhandle Industries, Inc. currently pays an annual common stock dividend of $2.20 per share. The company's dividend has grown steadily over the past 10 years at 8 percent per year; this growth trend isV expected to continue for the foreseeable future. The company's present dividend payout ratio, also expected to continue, is 40 percent. In addition, the stock presently sells at eight times current earnings-that is, its "multiple" is Calculate the company's cost of equity capital using the dividend capitalization model approach.