A firm has common stock with a market price of $25 per share and an expected dividend of $2 pershare at the end of the coming year. The growth rate in dividends has been 5 percent. The cost ofthe firm's common stock equity is
A) 5 percent.
B) 10 percent.
C) 13 percent.
D) 8 percent.

Question

Quizplus · Accepted Answer

The cost of the firm's common stock equity can be calculated using the Gordon's Growth Model: 
Cost of Equity = (Expected dividend/Current Stock Price) + Growth Rate 
= (2/25) + 0.05 
= 0.13 or 13% 
Therefore, the correct answer is option C, 13%.

A Firm Has Common Stock with a Market Price of $25