Final answer:
The firm's cost of common equity for Kingsford Corporation is calculated using the Gordon Growth Model. With a dividend of $4 expected to grow at 4% and a stock price of $58, the cost of equity is determined to be 11.17%, making option (c) the correct answer.
Step-by-step explanation:
The question asks to calculate the firm's cost of common equity for Kingsford Corporation given that the stock sells for $58 a share, it paid a dividend of $4 last year, and the dividend is expected to grow at 4% annually. The firm's cost of common equity is the return required by investors. To find this, we can use the Gordon Growth Model (also known as the Dividend Discount Model).
The model is as follows: Cost of Equity = (Dividends per Share for Next Year / Current Market Value of Stock) + Growth Rate of Dividends
The correct answer is c. 11.17% which is the firm's cost of common equity. Note that the firm's tax rate is not used in this calculation since cost of equity does not factor in taxes—it is the return required on a stock, pre-tax.