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Tim's Tools just issued a dividend of $2.22 per share on its common stock. The company is expected to maintain a constant 2.8 percent growth rate in its dividends indefinitely. If the stock sells for $19 a share, what is the company's cost of equity?Select one: a. 12.81 percent b. 13.37 percent c. 9.94 percent d. 14.81 percent e. 10.46 percent

Respuesta :

Answer:

option (d) 14.81%

Explanation:

Data provided in the question:

Dividend issued on common stocks, D0 = $2.22 per share

Growth rate, g = 2.8% = 0.028

Market price = $19

Now,

Cost of equity = ( D1 ÷ Market price ) + g

here,

Dividend payable next year, D1 = D0 × (1 + g)

= $2.22 × (1 + 0.028)

= $2.28216

Therefore,

Cost of equity =( $2.28216 ÷ $19 ) + 0.028

= 0.1481

or

= 0.1481 × 100%

= 14.81%

Hence,

the correct answer is option (d) 14.81%

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