IBM expects to pay a dividend of $2 next year and expects these dividends to grow at 9% a year. The price of IBM is $80 per share. What is IBM's cost of equity capital?
A) 9.20%
B) 10.35%
C) 10.93%
D) 11.50%

Question

Quizplus · Accepted Answer

D) Cost of equity is the next period dividend divided by the price plus the growth rate in dividends. Cost of equity = (Div₁/ P_E) + g = ($2 / $80) + 0.09 = 0.1150 = 11.50%

IBM Expects to Pay a Dividend of $2 Next Year