Question

Cost of common stock: Whitewall Tire Co. just paid a $1.60 dividend on its common shares. If Whitewall is expected to increase its annual dividend by 2 percent per year into the foreseeable future and the current price of Whitewall common shares is $11.66, what is the cost of common stock for Whitewall

Answer 1

Cost of common stock for Whitewall is 16.00%

Step-by-step explanation:

Ke = D1 / Price +g

D1 = Ke (Price + g)

D1 = $1.60 * (1+0.02)

D1 = $1.60 * (1.02)

D1 = $1.632

Ke = D1 / Price +g

We solve for Current dividend to derive the Cost of common stick

Ke = 1.632 / (11.66) + 2%

Ke = 1.632 / 11.66 + 0.02

Ke = 0.139966 + 0.02

Ke = 0.159966

Ke = 15.9966%

Ke = 16.00%