The Shoe Outlet has paid annual dividends of $.58, $.66, $.72, and $.75 per share over the last four years, respectively. The stock is currently selling for $10.08 a share. What is the cost of equity?

Question

Quizplus · Accepted Answer

To find the cost of equity, we can use the Dividend Discount Model (DDM):

Cost of Equity = (Next year's dividend / Current stock price) + growth rate

First, we need to estimate the growth rate. We can use the average growth rate over the last four years:

Average growth rate = (0.66/0.58)^(1/3) * (0.72/0.66)^(1/3) * (0.75/0.72)^(1/3) - 1
= 0.1025 or 10.25%

Next, we can use the most recent dividend to estimate the next year's dividend:

Next year's dividend = $0.75

Now we can plug in the numbers:

Cost of Equity = ($0.75 / $10.08) + 0.1025
= 0.0742 + 0.1025
= 0.1767 or 17.13%

Therefore, the best choice is B.

The Shoe Outlet Has Paid Annual Dividends of