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

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10 November, 07:45

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

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Mya Garner · Answer 1

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%