One can estimate the expected rate of return or the cost of equity capital as follows:
A)Dividend yield - expected rate of growth in dividends.
B)Dividend yield + expected rate of growth in dividends.
C)Dividend yield/expected rate of growth in dividends.
D)(Dividend yield)× (expected rate of growth in dividends).

Question

Quizplus · Accepted Answer

The cost of equity capital is the expected return that a company must offer to its shareholders to compensate for the risk they are taking by investing in the company's stock. The most commonly used method to estimate the cost of equity capital is the dividend discount model (DDM). According to this model, the expected rate of return is equal to the dividend yield plus the expected rate of growth in dividends. Therefore, the best choice is B, dividend yield + expected rate of growth in dividends.

One Can Estimate the Expected Rate of Return or the Cost