Question

Crane Tire Co. just paid an annual dividend of $1.70 on its common shares. If Crane is expected to increase its annual dividend by 5.10 percent per year into the foreseeable future and the current price of Crane’s common shares is $16.67, what is the cost of common stock for Crane? (Round intermediate calculations to 4 decimal places, e.g. 0.1555 and final answer to 2 decimal places, e.g. 15.25%.)

Answer 1

15.30 %

Step-by-step explanation:

The cost of common stock for Crane is the return that is expected by holders of Common Stock.

The cost of common stock can be determined using the dividend growth model as follows :

cost of common stock = Next year`s dividend / Current Market Price + Expected Growth Rate

= $1.70/$16.67 + 0.0510

= 15.30 %