Question

If Virusfree Inc's stock sells for $40, pays a $4.25 dividend, and the stock is expected to grow at a constant rate of 5%, which one of the following would be the estimated cost of equity? 15.63% 17.46% 14.52% 12.69%

Answer 1

15.63%

Step-by-step explanation:

The answer is simply calculated by putting a simple formula in place.

The formula is, P = D/(r-g)

Hence, applying the formula, we have the following values,

P: 40 , D: 4.25 , g: 0.05 & r: ?

Step 1: 40 = 4.25/(r-0.05)

Step 2: r = (4.25/40)+0.05

Hence the cost of equity is = 15.63%

Thankyou.