Question

UltraFlex Diving Boards, Inc. just paid a dividend of $1.50. If the firm's growth in dividends is expected to remain at a flat 4 percent forever, then what is the cost of equity capital for Ultra Flex Diving Boards if the price of its common shares is currently $26.00?

A) 5.77%
B) 6.00%
C) 9.77%
D) 10.00%

Answer 1

To calculate the cost of equity for UltraFlex Diving Boards, Inc., use the Dividend Discount Model with the provided dividend and growth rate, and the current share price, resulting in an equity cost of 9.77%.

Step-by-step explanation:

The student is asking how to calculate the cost of equity capital for UltraFlex Diving Boards, Inc., given a recent dividend, a constant growth rate in dividends, and the current price of its common shares. The cost of equity capital represents the return investors require on their investment in the firm's shares and is often estimated using the Dividend Discount Model (DDM). The DDM formula used in this context is:

Cost of Equity = (Dividend per share / Price per share) + Growth rate of Dividends

To find the cost of equity for UltraFlex Diving Boards, Inc., one would use the formula with the given values:

Cost of Equity = ($1.50 / $26.00) + 0.04 = 0.0577 + 0.04 = 0.0977 or 9.77%

Therefore, the correct answer is C) 9.77%.