The stock of a firm that pays an annual dividend of $10 and has a marginal tax rate of 40 percent is selling for $100. What is the firm's cost of equity capital?

Question

Quizplus · Accepted Answer

The cost of equity capital is calculated as the dividend per share divided by the current market price of the stock, plus the growth rate of dividends (which is not provided and thus assumed to be 0 in this case). Therefore, the cost of equity capital = $10 / $100 = 0.10 or 10%. The firm's marginal tax rate is not relevant in this calculation.

The Stock of a Firm That Pays an Annual Dividend