Question

Bouchard Company's stock sells for $20 per share, its last dividend (D0) was $1.00, and its growth rate is a constant 6 percent. What is its cost of common stock, rs? Select one: a. 5.0% b. 5.3% c. 11.0% d. 11.3% e. 11.6%

Answer 1

The answer is 11,3%

Step-by-step explanation:

The cost of common stock is common stockholders’ required rate of return. There are 3 methods to calculate the cost of common stock:

i- Dividend discount model or DMM

ii- Capital asset pricing model or CAPM

iii- Bond yield plus risk premium approach

Because of the information provided by the exercise, the correct method to use is de Dividend discount model.

Knowing the current market price of a stock and the last dividend paid, we can calculate the required rate of return, which is equal to the cost of common stock.

rs=(D1/P0)+g

D1= expected dividend

P0= current market price of the stock

g= dividend’s growth rate

To calculate D1 you need to use the following formula= D0x(1+g)

Using the exercise information:

D1=D0*(1+g)=1*1,06=1,06

P0=20

g=0,06

rs=(1,06/20)+0,06=0,113*100=11,3%