Jumbuck Exploration has a current stock price of $2.00 and is expected to sell for $2.10 in one year's time, immediately after it pays a dividend of $0.26. Which of the following is closest to Jumbuck Exploration's equity cost of capital?

Question 9 options:

A) 9%

B) 12%

C) 18%

D) 22%

Question

Johnston

Business

13 April, 09:08

Jumbuck Exploration has a current stock price of $2.00 and is expected to sell for $2.10 in one year's time, immediately after it pays a dividend of $0.26. Which of the following is closest to Jumbuck Exploration's equity cost of capital?

Question 9 options:

A) 9%

B) 12%

C) 18%

D) 22%

+4

Answers (1)

Know the Answer?

Kaylah Mathews · Answer 1

The equity cost of capital for the Jumbuck Exploration is 22%

Explanation:

Equity cost refers to the return offered to the customers in place of their investment in the organisation stocks. It is calculated by the formula

Rₐ = (D₁/P₀) + g

Where Rₐ = cost of equity

D₁ = dividends announced

P₀=share price (current)

g = growth rate

Now given details-

Dividend announced (D₁) - $ 0.26

Current market price (P₀) - $ 2.00

Expected price = $ 2.10

growth rate = expected price - current price

growth rate (g) = $ 0.10

Putting the values to find Rₐ

Rₐ = (0.26/2.00) + 0.10

Rₐ=0.23 or 23%

Nearest answer is 22%

Hence the equity cost of the capital is 22%

Jumbuck Exploration has a current stock price of $2.00 and is expected to sell for $2.10 in one year's time, immediately after it pays a dividend of $0.26. Which of the following is closest to Jumbuck Exploration's equity cost of capital?Question 9 options:A) 9%B) 12%C) 18%D) 22%

Jumbuck Exploration has a current stock price of $2.00 and is expected to sell for $2.10 in one year's time, immediately after it pays a dividend of $0.26. Which of the following is closest to Jumbuck Exploration's equity cost of capital?

Question 9 options:

A) 9%

B) 12%

C) 18%

D) 22%