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If the dividends to be paid in one year on a common stock issue are $3.50 per share, the current price of the stock is $50, and the expected growth rate in dividends is 6%, what is the cost of common stock?

Respuesta :

ahmedgodtrust

Answer: Ke = D1/Po + g

              Ke = $3.50/$50 + 0.06

              Ke = 0.07 + 0.06

              Ke = 0.13  = 13%

Explanation: Cost of equity is a function of dividend in 1 year's time divided  by the current market price plus growth rate.                                                                                                                                                            D1 represents dividend in 1 year's time, Po denotes the current market price and g is the growth rate.

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