If the dividends to be paid on a common stock issue are $3.50 per share, the price of the stock is $50, and the growth rate is 6%, calculate the cost of common stock.
A) 4.6%
B) 13%
C) 0.13%
D) 10%

Question

Quizplus · Accepted Answer

The cost of common stock can be calculated using the dividend discount model (also known as the Gordon Growth Model) for a perpetuity, which is given by the formula: Cost of Equity = (Dividends per share / Price per share) + Growth rate. Plugging in the given values: (3.50 / 50) + 0.06 = 0.07 + 0.06 = 0.13 or 13%.

If the Dividends to Be Paid on a Common Stock