Return to questionItem 1Item 1 Judy's Boutique just paid an annual dividend of $3.01 on its common stock. The firm increases its dividend by 3.70 percent annually. What is the company's cost of equity if the current stock price is $41.08 per share

Cost of Equity = 11.30%

Explanation:

Computation Cost for Equity

Using Gordon Model

Market Price = [Dividend * (1 + Growth Rate) ] / (Cost of Equity - Growth Rate)

41.08 = [$3.01 * (1 + 0.037) ] / (Cost of Equity - 0.037)

41.08 = [$3.01 * (1.037) ] / (Cost of Equity - 0.037)

Cost of Equity - 0.037 = $3.12 / 41.08

Cost of Equity - 0.037 = $0.076

Cost of Equity = 0.076 + 0.037

Cost of Equity = 0.1130

Cost of Equity = 11.30%