Ningbo Shipping has common stock with a market price of $25 per share and an expected dividend of $2 per share at the end of the coming year. The growth rate in dividends has been 5 percent and this growth is expected to continue indefinitely. Based on this information, the cost of the firm's common stock equity is
A) 5%.
B) 8%.
C) 10%.
D) 13%.

Question

Quizplus · Accepted Answer

The cost of equity can be calculated using the Gordon Growth Model: Cost of Equity = (Dividend/Price) + Growth Rate = ($2/$25) + 5% = 8% + 5% = 13%.

Ningbo Shipping Has Common Stock with a Market Price of $25