Question

Cullumber Wok Co. is expected to pay a dividend of $1.80 one year from today on its common shares. That dividend is expected to increase by 5.00 percent every year thereafter. If the price of Cullumber common stock is $20.00, what is the cost of its common equity capital?
A. Cost of common equity
%

Answer 1

Answer:

14.00%

Explanation:

Given that,

Expected Dividend = $1.80

Expected Growth Rate  of dividend = 5%

Price of Cullumber common stock = $20.00

Cost of Common Equity = (Expected Dividend ÷ Current Price ) + Growth Rate

                                       = (1.80 ÷ 20) + 5%

                                       = 0.09 + 5%

                                       = 14.00%

Therefore, the cost of its common equity capital is 14%.