Question:
The stock of Alpha Tool sells for $10.25 per share. Its current dividend rate, D0, is $1 per share. Analysts and investors expect Alpha to increase its dividends at a 10 percent rate for each of the next two years. This annual dividend growth rate is expected to decline to 8 percent for years 3 and 4 and then to settle down to 4 percent per year forever. Calculate the cost of internal equity for Alpha Tool.