Computer Corp. just paid a dividend of $0.75. If the firm's growth in dividends is expected to remain at a flat 3 percent forever, then what is the cost of equity capital for Computer Corp. if the price of its common shares is currently $12.00

A. 9.44%

B. 6.44%

C. 9.25%

D 6.25%

The answer is A.

Explanation:

One of the methods to determine cost of equity is the dividend growth model and the formula is:

(D1/Po) + g

D1 is the future or next year dividend

Po is the present share value

g is the growth rate

Since the dividend are expected to grow by 3 percent, then the future dividend will be

1.03 x $0.75

=$0.7725

Po = $12.00

g is 3 percent

($0.7725/$12) + 3%

0.06438 + 3%

6.44% + 3%

9.44%