Turquoise Electronics, Inc. paid a dividend of $1.87 last year. If the firm's growth in dividends is expected to be 10 percent next year and then zero thereafter, what is its cost of equity capital if the price of its common shares is currently $25.71?

Question

Business

Gina Mcclain

4 May, 03:01

Turquoise Electronics, Inc. paid a dividend of $1.87 last year. If the firm's growth in dividends is expected to be 10 percent next year and then zero thereafter, what is its cost of equity capital if the price of its common shares is currently $25.71?

+1

Answers (1)

Know the Answer?

Reginald Raymond · Answer 1

8.00%

Explanation:

Data provided in the question:

Dividend paid last year, D0 = $1.87

Dividend growth rate, g = 10%

Current Price of its common shares = $25.71

Now,

The dividend next year = D0 * (1 + g)

= $1.87 * (1 + 0.10)

= $2.057

Thus,

The cost of equity = [ D1 : (Current price) ] * 100%

= [ $2.057 : $25.71 ] * 100%

= 0.08000 * 100%

= 8.00%