## Cost of Equity:

The cost of equity is the rate of return investors require on the a firm's equity. According to the dividend discount model, the cost of equity is the sum of the stock's dividend yield and the stock's expected capital gains yield.

We can use the dividend growth model to compute the cost of equity as follows:

• cost of equity = last dividend *(1 + dividend growth rate) / current price + dividend growth rate
• cost of equity = 2 *(1 + 8%) / 36 + 8%
• cost of equity = 14%

Given that the management believes the appropriate price is 54, the implied cost of equity is:

• 2 *(1 + 8%) / 54 + 8% = 12%