Question

Sweet Treats common stock is currently priced at $17.15 a share. The company just paid $1.22 per share as its annual dividend. The dividends have been increasing by 2.4% annually and are expected to continue doing the same. What is this firm's cost of equity?a. 9.41%b. 9.51%c. 8.47%d. 9.68%e. 9.82%

Answer 1

Answer:

cost of equity =  9.68%

so correct option is d. 9.68%

Explanation:

given data

currently priced = $17.15

paid annual dividend = $1.22

dividends increasing = 2.4% annually

to find out

firm's cost of equity

solution

we get here cost of equity by apply price equation that is express as

Price = recent dividend × ( 1 + growth rate ) ÷ ( cost of equity - growth rate)   .....................1

put here value we get

$17.15 = $\frac{1.22*(1+0.024)}{cost\ of\ equity - 0.024}$

solve it we get

cost of equity =  9.68%

so correct option is d. 9.68%