QUESTION THREE

A firm wishes to measure its cost of common stock equity. The current market price of the firms shares is Kshs 150. The firm is expected to pay a dividend per share of ksh.3.55 next year and has been paying dividends in the sat as follows:

Year 2006 2005 2004 2003 2002 2001

Dividend 3.22 2.93 2.66 2.42 2.22 2.00

Per share

A new issue can be sold for only Kshs 140 per share and floatation costs of Kshs 10 per share

Determine the growth rate of dividends

The cost of retained earnings using Gordon Model

The cost of new issues using Gordon Model