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Today, 17:46

Jumbuck Exploration has a current stock price of $2.00 and is expected to sell for $2.10 in one year's time, immediately after it pays a dividend of $0.26. Which of the following is closest to Jumbuck Exploration's equity cost of capital?

Question 9 options:

A) 9%

B) 12%

C) 18%

D) 22%

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Answers (1)
  1. Today, 19:43
    0
    The equity cost of capital for the Jumbuck Exploration is 22%

    Explanation:

    Equity cost refers to the return offered to the customers in place of their investment in the organisation stocks. It is calculated by the formula

    Rₐ = (D₁/P₀) + g

    Where Rₐ = cost of equity

    D₁ = dividends announced

    P₀=share price (current)

    g = growth rate

    Now given details-

    Dividend announced (D₁) - $ 0.26

    Current market price (P₀) - $ 2.00

    Expected price = $ 2.10

    growth rate = expected price - current price

    growth rate (g) = $ 0.10

    Putting the values to find Rₐ

    Rₐ = (0.26/2.00) + 0.10

    Rₐ=0.23 or 23%

    Nearest answer is 22%

    Hence the equity cost of the capital is 22%
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