Answer:
The answer is 11,3%
Explanation:
The cost of common stock is common stockholders’ required rate of return. There are 3 methods to calculate the cost of common stock:
i- Dividend discount model or DMM
ii- Capital asset pricing model or CAPM
iii- Bond yield plus risk premium approach
Because of the information provided by the exercise, the correct method to use is de Dividend discount model.
Knowing the current market price of a stock and the last dividend paid, we can calculate the required rate of return, which is equal to the cost of common stock.
rs=(D1/P0)+g
D1= expected dividend
P0= current market price of the stock
g= dividend’s growth rate
To calculate D1 you need to use the following formula= D0x(1+g)
<u>Using the exercise information:</u>
D1=D0*(1+g)=1*1,06=1,06
P0=20
g=0,06
rs=(1,06/20)+0,06=0,113*100=11,3%
