Given that the cost of common stock is 18 percent, dividends are $1.50 per share and the price of the stock is $12.50 per share, what is the annual growth rate of dividends?
A) 4 percent
B) 5 percent
C) 6 percent
D) 8 percent

Question

Quizplus · Accepted Answer

The dividend yield can be calculated as follows:

Dividend Yield = Dividend per share / Price per share

= $1.50 / $12.50

= 0.12 or 12%

We know that the cost of common stock is 18 percent. To calculate the growth rate of dividends, we need to subtract the dividend yield from the cost of common stock.

Growth Rate of Dividends = Cost of Common Stock - Dividend Yield

= 18% - 12%

= 6%

Therefore, the annual growth rate of dividends is 6 percent, which corresponds to choice letter C.

Given That the Cost of Common Stock Is 18 Percent