Final answer:
To calculate Jumbuck Exploration's equity cost of capital, we need to find the required return on the stock. Given the expected price and dividend, we can calculate the dividend yield and capital gain yield to determine the expected return. The closest option to Jumbuck Exploration's equity cost of capital is 18%.
Step-by-step explanation:
To calculate Jumbuck Exploration's equity cost of capital, we need to find the required return on the stock. The equity cost of capital is the return that investors expect to earn on their investment in the company's stock. This return is typically determined based on the risk and expected return of similar investments in the market.
Given that Jumbuck Exploration is expected to sell for $2.10 in one year's time and pays a dividend of $0.26, we can calculate the expected return as follows:
- First, we calculate the dividend yield by dividing the dividend by the current stock price: $0.26 / $2.00 = 0.13 or 13%.
- Next, we calculate the capital gain yield by dividing the expected price increase by the current stock price: ($2.10 - $2.00) / $2.00 = 0.05 or 5%.
- Finally, we sum the dividend yield and capital gain yield to get the expected return: 13% + 5% = 18%.
Therefore, the closest option to Jumbuck Exploration's equity cost of capital is option C) 18%.