Question 7.2: Consolidated Edison, Inc. (Con Ed) is a regulated utility co...
Consolidated Edison, Inc. (Con Ed) is a regulated utility company that services the New York City area. Suppose Con Ed plans to pay $2.30 per share in dividends in the coming year. If its equity cost of capital is 7% and dividends are expected to grow by 2% per year in the future, estimate the value of Con Ed’s stock.
Plan
Because the dividends are expected to grow perpetually at a constant rate, we can use Eq. 7.6 to value Con Ed. The next dividend (Div_{1} ) is expected to be $2.30, the growth rate (g) is 2%, and the equity cost of capital (r_{E} ) is 7%.
Execute
P_{0}=\frac{Div_{1}}{r_{E}-g} =\frac{\$2.30}{0.07-0.02}=\$46.00Evaluate
You would be willing to pay 20 times this year’s dividend of $2.30 to own Con Ed stock because you are buying a claim to this year’s dividend and to an infinite growing series of future dividends.