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3 July, 13:21

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%

+3
Answers (1)
  1. 3 July, 16:29
    0
    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%
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Home » Business » 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.
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