Question

ONEOK Inc. has a common stock that just paid a dividend of $3 per share. If the common stock price today is $87 and the growth rate of firm is 0.04, find the cost of capital for common stock.

a. 12.46%
b. 7.59%
c. 4.22%
d. 16.95%
e. none of the answers is correct

Answer 1

Answer: b. 7.59%

Step-by-step explanation:

Using the Gordon growth model;

Price of stock = (Current dividend * (1 + growth rate))/(Cost of capital - growth rate)

87 = (3 * 1.04) / (c - 0.04)

87 * (c - 0.04) = 3 * 1.04

c - 0.04 = 3.12/87

c = 0.035862 + 0.04

c = ‭0.075862‬

c = 7.59%