Question

Jiffy Co. expects to pay a dividend of $3.00 per share in one year. The current price of Jiffy common stock is $60 per share. What is the cost of internal common equity (retained earnings) if the long-term growth in dividends is projected to be 9 percent indefinitely

Answer 1

the cost of the internal common equity is 14%

Step-by-step explanation:

The computation of the cost of internal common equity is shown below;

Stock Price = Dividend per share ÷ (required rate of return - growth rate)

$60 = $3 ÷ (required rate of return - 0.09)

60 required return - $5.4 = $3

60 required return = $8.4

So, the required return is

= 8.4 ÷ 60

= 14%

Hence, the cost of the internal common equity is 14%