Question

The Shoe Outlet has paid annual dividends of $.65, $.70, $.72, and $.75 per share over the last four years, respectively. The stock is currently selling for $9a share. What is this firm's cost of equity? |

8.74 percent |

13.65 percent |

10.38 percent |

9.53 percent |

11.79 percent |

Answer #1

Hello

**THE CORRECT ANSWER IS OPTION B : 13.65%**

Using artithmatic average method :

•To use the dividend growth model, we first need to find the growth rate in dividends. So, the increase in dividends each year was:

g_{1} = ($.70 – .65)/$.65 = 7.69%

g_{2} = ($.72 – .70)/$.70 = 2.86%

g_{3} = ($0.75 – .72)/$.72 = 4.17%

So, the average arithmetic growth rate in dividends was:

• g = (7.69%+2.86%+4.17%)/3 = 4.91%

• Using this growth rate in the dividend growth model, we find the cost of equity is:

• RE = [$0.75(1.0491)/$9.00] + .0491 = 13.65%

I hope this solves your doubt.

Do give a thumbs up if you find this helpful.

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