Question

Judy's Boutique just paid an annual dividend of $2.77 on its common stock. The firm increases its dividend by 3.50 percent annually. What is the company's cost of equity if the current stock price is $40.12 per share?

Answer 1

The cost of equity for Judy's Boutique is 10.4%.

Step-by-step explanation:

The cost of equity is the return on investment that investors expect to earn from owning a company's stock. In this case, we can calculate the cost of equity using the Dividend Growth Model.

The formula for the cost of equity is: Cost of equity = Dividend / Stock Price + Growth Rate.

Given that the annual dividend is $2.77, the stock price is $40.12 per share, and the dividend growth rate is 3.50 percent, we can plug these values into the formula:

Cost of equity = $2.77 / $40.12 + 0.035 = 0.069 + 0.035 = 0.104 = 10.4%.

Therefore, the company's cost of equity is 10.4%.