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Cost of Equity and Dividend Determination

The preferred stock of Nadine Fashions pays an annual dividend of $2.3 a share and sells for $45 a share. The tax rate is 34 percent. What is the firm's cost of preferred stock?

2.73 percent
5.93 percent
5.11 percent
4.56 percent

The common stock of Pittsburgh Steel Products has a beta of 1.52 and a standard deviation of 16.75 percent. The market rate of return is 9 percent and the risk-free rate is 3 percent. What is the cost of equity for Pittsburgh Steel Products?

12.12 percent
10.05 percent
9.09 percent
10.30 percent
13.89 percent

Last week, Lester's Electronics paid an annual dividend of $2.75 on its common stock. The company has a longstanding policy of increasing its dividend by 3 percent annually. This policy is expected to continue. What is the firm's cost of equity if the stock is currently selling for $42.5 a share?
9.66 percent
7.77 percent
8.80 percent
7.22 percent
9.91 percent

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Solution Preview

1. Cost of Preferred = Dividend/Price = 2.3/45 = 5.11%

2. Cost of Equity = Risk Free Rate + ...

Solution Summary

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