Final answer:
To calculate the cost of equity capital for Gangland Water Guns, Inc, the Gordon Growth Model is used. The cost of equity is found to be 15%, based on the expected dividend payment, the current share price, and a flat dividend growth rate.
Step-by-step explanation:
The question pertains to the estimation of the cost of equity capital for Gangland Water Guns, Inc. This cost can be derived using the Gordon Growth Model (also known as the Dividend Discount Model), which relates the current price of the stock to the expected dividend one year from today and the growth rate of dividends.
The formula for the Gordon Growth Model is:
Cost of Equity = (Dividend_{Year 1} / Price) + Growth Rate
Using the given figures:
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- Expected Dividend (Dividend_{Year 1}) = $2.10
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- Current Share Price (Price) = $17.50
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- Growth Rate = 3%
Therefore, Cost of Equity = ($2.10 / $17.50) + 3% = 0.12 + 0.03 = 0.15 or 15%
Thus the cost of equity capital for Gangland Water Guns, Inc. is 15.00%, which corresponds to option C.