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The Down and Out Co. just issued a dividend of $2.66 per share on its common...

The Down and Out Co. just issued a dividend of $2.66 per share on its common stock. The company is expected to maintain a constant 7 percent growth rate in its dividends indefinitely. If the stock sells for $40 a share, what is the company's cost of equity?

14.12%

7.29%

13.41%

14.82%

13.65%

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Answer #1

The cost of equity is computed as shown below:

= [ Dividend just issued (1 + growth rate) / (Selling price of stock) ] + growth rate

= [ $ 2.66 (1 + 0.07) / ($ 40) ] + 0.07

= 14.12% Approximately

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