Question

Whidbey Industries just paid an annual dividend of $1.50 a share. The market price of the stock is $30 and the growth rate is 5 percent. What is the firm’s cost of equity?

a: 5%

b: 10.25%

c: 5.25%

d: 10%

Answer 1

Cost of equity is computed as shown below:

= [ [ Annual dividend x (1 + growth rate) ] / price of stock ] + growth rate

= [ [ $ 1.50 x 1.05) / $ 30 ] + 5%

= 10.25%

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