To calculate the cost of equity using the Dividend Discount Model (DDM), specifically the Gordon Growth Model, we use the following formula:

$r_e = \frac{D_1}{P_0} + g$

Where:

• $r_e$ = Cost of equity
• $D_1$ = Dividend expected in the next year
• $P_0$ = Current price of the stock
• $g$ = Growth rate of dividends

Given:

• Last dividend ($D_0$) = $2
• Growth rate ($g$) = 6% or 0.06
• Current stock price ($P_0$) = $42.4

First, calculate $D_1$ (the expected dividend for the next year):

$D_1 = D_0 \times (1 + g) = 2 \times (1 + 0.06) = 2 \times 1.06 = 2.12$

Now, plug $D_1$, $P_0$, and $g$ into the formula for $r_e$:

$r_e = \frac{2.12}{42.4} + 0.06$

$r_e = 0.05 + 0.06 = 0.11$

So, the cost of equity $r_e$ is approximately 11%, which corresponds to g. 11.

---

Would you like a more detailed explanation or have any other questions?

Here are some related questions you might be interested in:

1. How does the growth rate of dividends affect the cost of equity?
2. What are the limitations of the Gordon Growth Model?
3. How would a higher stock price impact the cost of equity?
4. What other models can be used to estimate the cost of equity?
5. How would a decrease in dividend growth rate affect the cost of equity?

Tip: The Gordon Growth Model is best suited for companies with stable and predictable dividend growth rates. For companies with more volatile dividends, alternative models like the Capital Asset Pricing Model (CAPM) might be more appropriate.