The bonds your company just issued carry a yield to maturity of 9%, and you have

Question

The bonds your company just issued carry a yield to maturity of 9%, and you have preferred stock outstanding which pays a 7% dividend yield. Your company has a tax rate of 33%. Your company is capitalized with Equal Parts of Common Stock, Preferred Stock, and Debt. Your stock, which just yesterday (isn't that convenient...) paid a dividend of $2.00 per share, currently trades at $22 per share. The dividend is expected to grow at 5% per year, indefinitely. Q: What rate of return do investors apparently require on your firm's stock? Enter your answer as percentage, not as a decimal. For example, ten percent would be entered as "10" or as "10.000" and NOT as "10%" nor as "0.10".

Explanation / Answer

Hi,

Please find the detailed answer as follows;

Cost of Equity/Rate of Return on Firm's Stock = D1/Current Stock Price + Growth Rate = 2*(1+5%)/22 + .05 = 14.55%

Answer is 14.55%.

Thanks.

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