Question

Jumbuck Exploration has a current stock price of $ 2.00 and is expected to sell for $ 2.10 in one​ year's time, immediately after it pays a dividend of $ 0.23. Which of the following is closest to Jumbuck​ Exploration's equity cost of​ capital?

Answer 1

Growth rate Calculation

Growth rate = [($2.10 - $2.00) / $2.00] x 100

= [$0.10 / $2.00] x 100

= 5.00%

Jumbuck Exploration's equity cost of capital

Here, we’ve the Current price per share of common stock (P0) = $2.00 per share

Expected dividend per share next year (D1) = $0.23 per share

Constant annual dividend growth rate (g) = 5.00%

Therefore, the Jumbuck Exploration's equity cost of capital (Ke) = [D1 / P0] + g

= [$0.23 / $2.00] + 0.05

= 0.1150 + 0.05

= 0.1650 or

= 16.50% or

= 17% (Approximately)

“Hence, the Jumbuck Exploration's equity cost of capital will be 17%”