Question

Bouchard Company's stock sells for $21 per share, its last dividend (D0) was $1.00, and its growth rate is a constant 4 percent. What is its cost of common stock, rs ? Express your answer in percentage (without the % sign) and round it to two decimal places. (i.e., 12.54 for 0.1254 ) Your Answer: Answer

Answer 1

The cost of common stock, rs, for Bouchard Company is calculated to be 8.95% using the Gordon Growth Model with the given dividend, stock price, and growth rate.

Step-by-step explanation:

To calculate the cost of common stock, rs, for Bouchard Company, we can use the Gordon Growth Model (also known as the Dividend Discount Model). The formula for the cost of common stock using this model is:

rs = (D₁ / P0) + g

where:

• D₁ is the dividend expected at the end of the first period (D0*(1+g)),
• P₀ is the current stock price,
• g is the growth rate of dividends.

Using the information provided:

D₀ = $1.00
P₀ = $21.00
g = 4% or 0.04

First, we need to calculate D1, which is the dividend expected next year (D0*(1+g)):

D₁ = $1.00 * (1 + 0.04) = $1.04

Now, we plug all the values into the formula:

rs = ($1.04 / $21) + 0.04
rs = 0.0495 + 0.04
rs = 0.0895 or 8.95%

So, the cost of common stock, rs, for Bouchard Company is 8.95%.