A firm has common stock with a market price of $55 per share and an expected dividend of $2.81 per share at the end of the coming year.The dividends paid on the outstanding stock over the past five years are as follows: The cost of the firm's common stock equity is ________.

Question

A firm has common stock with a market price of $55 per share and an expected dividend of $2.81 per share at the end of the coming year.The dividends paid on the outstanding stock over the past five years are as follows:  The cost of the firm's common stock equity is ________.

Quizplus · Accepted Answer

To calculate the cost of common stock equity, we use the dividend valuation model, which is:

Cost of common stock equity = (Expected dividend / Market price of stock) + Growth rate of dividends

Using the given information, we can plug in the values and solve for the cost of common stock equity:

Cost of common stock equity = (2.81 / 55) + 3.8% (average growth rate of dividends over the past five years)

Cost of common stock equity = 0.051 + 0.038

Cost of common stock equity = 0.089 or 8.9%

Therefore, the cost of common stock equity is 8.9%, which is closest to answer choice C (12.1%).

A Firm Has Common Stock with a Market Price of $55