(a) Dunkin’ Donuts’ preferred stock currently sells for $20/share. The preferred

Question

(a) Dunkin’ Donuts’ preferred stock currently sells for $20/share. The preferred stock is expected to pay a perpetual $1.80 dividend per share each year forever. Calculate the cost of preferred stock for Dunkin’ Donuts. (b) Dunkin’ Donuts’ common stock currently sells for $40/share. The stock is expected to pay a constantly growing perpetual dividend per share, starting with $2.40 at t=1 and growing by a constant rate of 5% per year thereafter. Calculate the cost of common stock for Dunkin’ Donuts.

Explanation / Answer

Cost of Preferred Stock = $1.80/$20 = 9% Price of stock = Dividend / Ke – G $40 = $2.40 / Ke – 5% $40Ke - $2 = $2.40 Ke = $4.40/$40        => 11%

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