A firm has common stock with a market price of $25 per share and an expected dividend of $2 per share at the end of the coming year. The growth rate in dividends has been 5%. The cost of the firms commonstock equity is

PERFORMANCE MEASUREMENT

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Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]

A firm has common stock with a market price of $25 per share and an expected dividend of $2 per share at the end of the coming year. The growth rate in dividends has been 5%. The cost of the firm’s commonstock equity is

A	5%
B	8%
C	10%
D	13%

Explanation:

Detailed explanation-1: -Answer and Explanation: The cost of the firm’s common stock equity is D) 13 percent.

Detailed explanation-2: -The most basic equation is: Growth = ROE × (1-payout ratio). E.g. if the company pays 40% of its earnings as dividends and its ROE = 15%, then its growth will be 15% * (1-. 4) = 9%.

Detailed explanation-3: -In the dividend growth model, dividends are assumed to grow at a constant rate indefinitely. In such a model, the total rate of return on a stock is the sum of dividend yield and dividend growth rate.

Detailed explanation-4: -price-earnings ratio (P/E): The ratio found by dividing market price per share by earnings per share (This ratio indicates what investors think of the firm’s earnings’ growth and risk prospects.)

Detailed explanation-5: -Market value per share is the price at which a share of company stock can be acquired in the marketplace, such as on a stock exchange. This price varies throughout the day, based on the level of demand for the stock.

There is 1 question to complete.

ECONOMICS

COST ACCOUNTING

PERFORMANCE MEASUREMENT