Company ABC just paid an annual dividend of $3.55 on its common stock. The firm increases its dividend by 3.55 percent annually. What is the company's cost of equity if the current stock price is $43.24 per share?

8.5%

Explanation:

Company ABC just paid an annual dividend of $3.55

The firm increases its dividend by 3.55 percent annually

The current stock price is $43.24

Therefore the company cost of equity can be calculated as follows

= 3.55 × (1+3.55/100)/43.24+3.55/100

= 3.55 × 1+0.0355/43.24+0.0355

= 3.55 × 1.0355/43.2755

= 3.6760/43.2755

= 0.085× 100

= 8.5%

Hence the company cost of equity is 8.5%

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