The Sugar Cookie Company just paid its annual dividend of $.45 a share. The stock has a market price of $21 and a beta of .88. The return on Treasury bills is 4.2 percent and the market has an 11.8
Percent rate of return. What is the cost of equity for the Cookie Company?

Question

Quizplus · Accepted Answer

First, we need to calculate the dividend yield:
Dividend Yield = Dividend/Market Price = .45/21 = .0214
Next, we need to use the Capital Asset Pricing Model (CAPM) to calculate the cost of equity:
Cost of Equity = Risk-Free Rate + Beta*(Market Return - Risk-Free Rate)
= 4.2% + .88*(11.8% - 4.2%)
= 10.89%
Therefore, the answer is C.

The Sugar Cookie Company Just Paid Its Annual Dividend of $.45