Stock selling price is Rs 35, expected dividend is Rs 5 and expected growth rate is 8% then cost of common stock would be
A. 40.00%
B. 22.29%
C. 14.28%
D. 80.00%
Answer: Option B
This Question Belongs to Commerce >> Financial Management
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Investment is the _______________.
A. net additions made to the nation’s capital stocks
B. person’s commitment to buy a flat or house
C. employment of funds on assets to earn returns
D. employment of funds on goods and services that are used in production process
Financial Management is mainly concerned with ______________.
A. All aspects of acquiring and utilizing financial resources for firms activities
B. Arrangement of funds
C. Efficient Management of every business
D. Profit maximization
The primary goal of the financial management is ____________.
A. to maximize the return
B. to minimize the risk
C. to maximize the wealth of owners
D. to maximize profit
In his traditional role the finance manager is responsible for ___________.
A. proper utilisation of funds
B. arrangement of financial resources
C. acquiring capital assets of the organization
D. efficient management of capital
To calculate the cost of common stock using the Dividend Discount Model (DDM), we can use the following formula:
Cost of Common Stock (Ke) = (Dividend / Stock Price) + Growth Rate
Given:
Stock Selling Price (P0) = Rs 35
Expected Dividend (D1) = Rs 5
Expected Growth Rate (g) = 8% or 0.08 (expressed as a decimal)
Now, we can calculate the cost of common stock:
Cost of Common Stock (Ke) = (5 / 35) + 0.08
Cost of Common Stock (Ke) ≈ 0.142857 + 0.08
Cost of Common Stock (Ke) ≈ 0.222857
Converting the cost to a percentage:
Cost of Common Stock (Ke) ≈ 0.222857 * 100%
Cost of Common Stock (Ke) ≈ 22.29%
Therefore, the correct answer is B. 22.29%.