Question

Jumbuck Exploration has a current stock price of $3.00 and is expected to sell for $3.15 in one year's time, immediately after it pays a dividend of $0.28. Which of the following is closest to Jumbuck Exploration's equity cost of capital?

a. 7.17%
b. 17.91%
c. 8.60%
d. 14.33%

Answer 1

The equity cost of capital for Jumbuck Exploration can be calculated using the dividend growth model, taking into account the expected future dividends and the current stock price.

Step-by-step explanation:

The equity cost of capital is the rate of return required by investors to hold shares in a company. It can be calculated using the dividend growth model, which takes into account the expected future dividends and the current stock price. To calculate the equity cost of capital for Jumbuck Exploration, we can use the formula:

Equity Cost of Capital = (Dividend / Stock Price) + Growth Rate

In this case, the dividend is $0.28 and the stock price is $3.00. The expected stock price in one year is $3.15. The growth rate can be calculated as the percentage change in stock price: (3.15 - 3.00) / 3.00 = 0.05.

Plugging in the values, we get: (0.28 / 3.00) + 0.05 = 0.0933 + 0.05 = 0.1433.

Therefore, the closest option to Jumbuck Exploration's equity cost of capital is 14.33% (option d).