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Cost of equity for Lester's Electronics

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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?

1. 9.66 percent
2. 7.77 percent
3. 8.80 percent
4. 7.22 percent
5. 9.91 percent.

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