Question

Judy's Boutique just paid an annual dividend of $3.19 on its common stock. The firm increases its dividend by 3.85 percent annually. What is the company's cost of equity if the current stock price is $41.80 per share?

12.18%

11.78%

11.48%

10.84%

11.16%

Answer 1

Current dividend= $3.19

Dividend growth rate= 3.85%

Current stock price= $41.80

The cost of equity is calculated using the below formula:

Ke=D1/Po+g

Where:

D1= Next year’s dividend

Po=Current stock price

g=Firm’s growth rate

Ke= $3.19*(1+0.0385)/ $41.80 + 0.0385

     = $3.3128/ $41.80 + 0.0385

     = 0.0793 + 0.0385

     = 0.1178*100

     = 11.78%.

Therefore, the company’s cost of equity is 11.78%.

In case of any further queries, kindly comment on the solution.