Question

Cullumber Tire Co. just paid an annual dividend of $1.20 on its common shares. If Cullumber is expected to increase its annual dividend by 8.10 percent per year into the foreseeable future and the current price of Cullumber’s common shares is $11.10, what is the cost of common stock for Cullumber? (Round intermediate calculations to 4 decimal places, e.g. 0.1555 and final answer to 2 decimal places, e.g. 15.25%.)

Sheridan Luxury Liners has preferred shares outstanding that pay an annual dividend equal to $16 per year. If the current price of Sheridan preferred shares is $80.00, what is the after-tax cost of preferred stock for Sheridan?

Answer 1

a.cost of common stock=(D1/Current price)+Growth rate

=[(1.2*1.081)/11.1]+0.081

=(1.2972/11.1)+0.081

=19.79%(Approx).

b.After-tax cost of preferred stock=Annual dividend/Current value

=16/80

=20%