Sheridan Tire Co. just paid an annual dividend of $1.20 on its common shares. If Sheridan is expected to increase its annual dividend by 3.10 percent per year into the foreseeable future and the current price of Sheridan’s common shares is $15.54, what is the cost of common stock for Sheridan?
Solution:
Cost of common stock = D1/P0 + g
Where D1 = next expected dividend
P0 = Current price
g = Growth rate
Cost of common stock = ($1.20*103.10%) / $15.54 + 0.0310 = 11.06%
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