Question

Judy's Boutique just paid an annual dividend of $2.77 on its common stock. The firm increases its dividend by 3.50 percent annually. What is the company's cost of equity if the current stock price is $40.12 per share?

Answer 1

Answer:

10.4%

Explanation:

The formula to calculate the cost of equity is:

Cost of equity= (DPS/MPS)+r

DPS= Dividend per share

MPS= Market price per share

r= Growth rate of Dividends

Cost of equity= (2.77/40.12)+0.0350

Cost of equity=0.069+0.0350

Cost of equity=0.104→ 10.4%

The company's cost of equity if the current stock price is $40.12 per share is 10.4%.