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judy's boutique just paid an annual dividend of $3.13 on its common stock. the firm increases its dividend by 3.80 percent annually. what is the company's cost of equity if the current stock price is $41.56 per share? multiple choice 10.70% 11.62% 12.02% 11.33% 11.02%

Respuesta :

The company's cost of equity is equal to 11.62% if the current stock price is $41.56 per share.

To determine the company's cost of equity, we can use the Gordon model as follows;

stock price = dividend×(1 + growth rate) /  cost of equity - growth rate

Now substituting the values;

41.56 = 3.13×(1 + 0.038) / cost of equity - 0.038

41.56 = 3.13×1.038 / cost of equity - 0.038

41.56 = 3.249 / cost of equity - 0.038

41.56 (cost of equity - 0.038) = 3.249

41.56(cost of equity) - 1.58 = 3.249

41.56(cost of equity) = 3.249 + 1.58

41.56(cost of equity) = 4.829

cost of equity = 4.829 / 41.56 = 0.1162

Converting into percentage;

cost of equity = 0.1162 × 100 = 11.62%

Hence the company's cost of equity is calculated to be 11.62%.

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