The expected dividend is $2.50 for a share of stock priced at $25.What is the cost of common equity if the long-term growth in dividends is projected to be 8%?

Question

Quizplus · Accepted Answer

The cost of common equity can be calculated using the Gordon growth model:

Cost of Common Equity = (Expected Dividend/Current Stock Price) + Expected Dividend Growth Rate

Substituting the values,

Cost of Common Equity = (2.5/25) + 0.08 = 0.18 or 18%

Therefore, the correct choice is D, 18%.

The Expected Dividend Is $2