Case Narrative: A firm’s capital structure includes the following securities. It

Question

Case Narrative: A firm’s capital structure includes the following securities. It has 500,000 shares of common stock (equity) outstanding, selling for $20 per share. The preferred stock share price is $50 and which a $4 dividend with no growth expected. Each share of common stock sells for $20 and pays a $1.00 dividend, which is expected to grow by 2% per year. The current price of the bonds is $818, and the coupon rate is 5%. The bonds will mature in 10 years.

What is the cost (required rate of return) of the common stock?

Explanation / Answer

cost (required rate of return) of the common stock

=(Dividend in year 1/current selling price)+growth rate

=((1*(1+2%))/20)+2%

=7.10%

the above is the answer

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