If the dividends to be paid in one year on a common stock issue are $3.50 per share, the current price of the stock is $50, and the expected growth rate in dividends is 6%, what is the cost of common stock?

Question

Business

Anne Kelly

1 June, 03:33

If the dividends to be paid in one year on a common stock issue are $3.50 per share, the current price of the stock is $50, and the expected growth rate in dividends is 6%, what is the cost of common stock?

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Answers (1)

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Halle Weiss · Answer 1

Answer: Ke = D1/Po + g

Ke = $3.50/$50 + 0.06

Ke = 0.07 + 0.06

Ke = 0.13 = 13%

Explanation: Cost of equity is a function of dividend in 1 year's time divided by the current market price plus growth rate. D1 represents dividend in 1 year's time, Po denotes the current market price and g is the growth rate.