Question

Judy's Boutique just paid an annual dividend of $3.31 on its common stock. The firm increases its dividend by 3.75 percent annually. What is the company's cost of equity if the current stock price is $42.28 per share

Answer 1

Answer:

Cost of equity = 11.87%

Explanation:

Cost of equity is defined as the amount that a business pays to its equity investors or shareholders as compensation for the risk of finding the business.

Usually businesses may not have enough capital to run their operations properly in meeting organisational goals. So they seek for funding from investors, and these investors are compensated for giving the business capital.

The formula for cost of equity is

Cost of equity={ (Dividend * Growth rate) ÷ Current stock price} + percentage increase in dividend)

Cost of equity={ (3.31 * 1.0375) ÷ 42.28} + 0.0375)

Cost of equity= (3.434 ÷ 42.28) + 0.0375 = 0.1187

Cost of equity = 11.87%

Answer 2

Answer:

11.87%

Explanation:

Calculation for Judy's Boutique company's cost of equity if the current stock price is $42.28 per share

Using this formula

RE=[(Annual dividend×dividend Increase percentage)/current stock price]+dividend increase percentage

Let plug in the formula

RE = [($3.31× 1+.0375) / $42.28] + .0375

RE=[($3.31×1.0375)/$42.28]+.0375

RE=($3.434125/$42.28)+.0375

RE=0.0812233+.0375

RE=0.1187×100

RE=11.87%

Therefore the company's cost of equity if the current stock price is $42.28 per share would be 11.87%