Question

The last paid dividend is​ $4 for a share of common stock that is currently selling for​ $50. What is the cost of common equity if the​ long-term growth rate on dividends for the firm is expected to be​ 8%?

Answer 1

16.64%

Step-by-step explanation:

The computation of the cost of common equity is shown below:

= (Current year dividend) ÷ (Current selling price of common stock) + Growth rate

where,

Current year dividend

= $4 + $4 × 8%

= $4 + 0.32

= $4.32

The other items rate would remain same

Now put these values to the above formula

So, the value would equal to

= ($4.32) ÷ (50) + 8%

= 8.64% + 8%

= 16.64%