Question

Turquoise Electronics, Inc. paid a dividend of $1.87 last year. If the firm's growth in dividends is expected to be 10 percent next year and then zero thereafter, then what is its cost of equity capital if the price of its common shares is currently $25.71?

A) 7.27%
B) 8.00%
C) 18.00%
D) The problem is not solvable with the information that is given.

Answer 1

The cost of equity capital for Turquoise Electronics, Inc. is a. 7.27%.

Step-by-step explanation:

To calculate the cost of equity capital for Turquoise Electronics, Inc., we need to use the Dividend Discount Model (DDM). According to the DDM, the cost of equity capital can be calculated as the dividend per share divided by the current price per share. In this case, the dividend per share is $1.87 and the price per share is $25.71.

So, the cost of equity capital is $1.87 / $25.71 ≈ 0.0727 or 7.27%.

Therefore, the correct answer is A) 7.27%.