Martin Corporation's common stock is currently selling for $50 per share. The current dividend is $2.00 per share. If dividends are expected to grow at 6 percent per year, then what is the firm's cost of common stock?
A) 10.0%
B) 10.2%
C) 10.6%
D) 10.8%
E) 11.0%

Question

Quizplus · Accepted Answer

The cost of common stock (also known as the required rate of return) can be calculated using the following formula:
Cost of common stock = (dividend yield + dividend growth rate)
In this case, the dividend yield is $2/$50, or 4%. The dividend growth rate is 6%. Therefore, the cost of common stock is 4% + 6%, or 10%. The closest option is B, which is 10.2%, which is the correct answer.

Martin Corporation's Common Stock Is Currently Selling for $50 Per