Xcom Industries will pay a dividend of $0.44 next year,and expects its dividends to grow at 8% per year.The current price of Xom stock is $6.45 per share.What is Xom's cost of equity?
A)17%
B)14.8%
C)6.8%
D)7.4%
E)15.4%

Question

Quizplus · Accepted Answer

We can use the dividend discount model (DDM) to calculate the cost of equity:

Cost of Equity = (Next Year's Dividend / Current Stock Price) + Dividend Growth Rate

Cost of Equity = ($0.44 / $6.45) + 0.08 = 0.14 or 14.8%

Therefore, the correct answer is B, 14.8%.

Xcom Industries Will Pay a Dividend of $0