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 using the dividend growth model, we use the formula: 
Cost of common stock equity = (Dividend / Current market price of stock) + dividend growth rate

The dividend growth rate is calculated using the formula: 
Dividend growth rate = (Dividend at end of current year / Dividend at end of previous year)-1

Using the given information, we can calculate the dividend growth rate as:
Dividend growth rate = (2.81/2.48)-1= 0.129

Now using the formula for cost of common stock equity, we get:
Cost of common stock equity = (2.81/55) + 0.129 = 0.057 + 0.129 = 0.186 or 18.6%

Therefore, the best choice is C) 12.1 percent.

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