IBM expects to pay a dividend of $5 next year and expects these dividends to grow at 7% a year. The price of IBM is $90 per share. What is IBM's cost of equity capital?
A) 3.77%
B) 5.02%
C) 7%
D) 12.56%

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 = ($5 / $90) + 0.07 = 0.1256 = 12.56%

IBM Expects to Pay a Dividend of $5 Next Year