Greengrocer Foods will pay a dividend of $3.75 per share in one year and expects this dividend to grow at a rate of 4% for the foreseeable future.If its common shares are currently trading at $50, what is the cost of Greengrocer Foods' equity?

Question

Quizplus · Accepted Answer

The cost of equity can be calculated using the dividend growth model:
Cost of equity = (Dividend next year / Current stock price) + dividend growth rate
= ($3.75 / $50) + 0.04
= 0.075 + 0.04
= 0.115 or 11.50%
Therefore, the best choice is B, which is the closest to our calculation.

Greengrocer Foods Will Pay a Dividend of $3