Oriole Tire Co. just paid an annual dividend of $1.70 on its common shares. If Oriole is expected to increase its annual dividend by 3.10 percent per year into the foreseeable future and the current price of Oriole's common shares is $19.65, what is the cost of common stock for Oriole? (Round intermediate calculations to 4 decimal places, e. g. 0.1555 and final answer to 2 decimal places, e. g. 15.25%.)

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Business

Grace Krueger

8 February, 22:30

Oriole Tire Co. just paid an annual dividend of $1.70 on its common shares. If Oriole is expected to increase its annual dividend by 3.10 percent per year into the foreseeable future and the current price of Oriole's common shares is $19.65, what is the cost of common stock for Oriole? (Round intermediate calculations to 4 decimal places, e. g. 0.1555 and final answer to 2 decimal places, e. g. 15.25%.)

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Answers (1)

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Giuliana Dyer · Answer 1

Cost of common stock is 12.02%

Explanation:

The cost of common stock can be computed from share price formula given below:

share price=do * (1+g) / r-g

do is the dividend just paid which is $1.70

g is the expected dividend growth per year which is 3.10%

r is the cost of common stock which is unknown

share price is $19.65

by changing the subject of the formula:

r=do * (1+g) / share price+g

r=1.70 * (1+3.10%) / 19.65+3.10%

r=1.7527/19.65+3.10%

r=0.0892+3.10%=12.02%

The company's cost of capital which is also the cost of common stock is 12.02%