Question

If ABC corporation paid a dividend of $6 per share last year. The stock currently sells for $80 per share. You estimate that the dividend will grow steadily at a rate of 6% per year into the indefinite future. What is the cost of equity?
a. 7.5%
b. 7.95%
c. 11.50%
d. 13.50%
e. 13.95%

Answer 1

Answer:

option (e) 13.95%

Explanation:

Data provided in the question:

Dividend paid, D0 = $6 per share

Current selling price = $80 per share

Dividend growth rate = 6% = 0.06

Now,

Cost of equity = [ D1 ÷ Current price] + Growth rate

=  [ ( D0 × (1 + g) ) ÷ $80 ] + 0.06

=  [ ( $6 × (1 + 0.06) ) ÷ $80 ] + 0.06

= [ 6.36 ÷ $80 ] + 0.06

= 0.1395

or

= 0.1395 × 100%

= 13.95%

Hence,

The correct answer is option (e) 13.95%