The Down and Out Co. just issued a dividend of $2.71 per share on its common sto

Question

The Down and Out Co. just issued a dividend of $2.71 per share on its common stock. The company is expected to maintain a constant 6 percent growth rate in its dividends indefinitely. If the stock sells for $30 a share, what is the company's cost of equity? (Do not round your intermediate calculations.) Hint: In chapter 8 we calculated the stock price as the present value of future dividends. This is a constant growth stock, and you know the price, the last dividend paid, and the growth rate in the dividend. Simply calculate the next dividend to be paid and back-out the required return (discount rate) on the stock. A) 9.78% B)14.8% C)15.58% D)16.35% E)15.03%

Explanation / Answer

RE = [ $2.71(1.06) / $30 ] + .06=0.1557533=15.57533%

C)15.58% -----ANSWER

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