Question

What is the cost of common stock with most recent dividend of

$2.86, growth 7%, stock price $36?

Answer 1

The cost of the common stock with a most recent dividend of $2.86, a growth rate of 7%, and a stock price of $36 is calculated to be 15.5% using the Dividend Discount Model.

Step-by-step explanation:

The cost of common stock can be calculated using the Dividend Discount Model (DDM), which takes into account the most recent dividend payment, the growth rate of dividends, and the current stock price. In this situation, with a most recent dividend of $2.86, a growth rate of 7%, and a stock price of $36, we can use the formula:

Cost of common stock (r) = (D1 / P0) + g

Where D1 is the expected dividend next year, P0 is the current stock price, and g is the growth rate. To find D1:

D1 = D0 * (1 + g)

Therefore,

D1 = $2.86 * (1+0.07) = $3.06

Now we can calculate the cost of common stock:

r = ($3.06 / $36) + 0.07 = 0.085 + 0.07 = 0.155 or 15.5%

The cost of common stock, or the required rate of return, in this case, is 15.5%.