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 discount model. The closest answer to Jumbuck Exploration's equity cost of capital is d. 14.33%.

Step-by-step explanation:

To calculate the equity cost of capital, you can use the dividend discount model (DDM). The equity cost of capital is the return that an investor expects to earn on their investment in a company's stock. In this case, since Jumbuck Exploration is expected to sell for $3.15 in one year's time and is paying a dividend of $0.28, we can calculate the equity cost of capital as follows:

1. Calculate the dividend yield by dividing the dividend by the current stock price: $0.28 / $3.00 = 0.0933, or 9.33%.
2. Calculate the capital gain by subtracting the current stock price from the expected selling price: $3.15 - $3.00 = $0.15.
3. Divide the capital gain by the current stock price to get the capital gain yield: $0.15 / $3.00 = 0.05, or 5%.
4. Add the dividend yield and the capital gain yield together to get the equity cost of capital: 9.33% + 5% = 14.33%.

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