The Third Cup Company Has a Return on Equity of 10

question 48

Multiple Choice

The Third Cup Company has a return on equity of 10% and pays out 30% of its earnings as dividends.The company is expected to pay a dividend of $2 next year and the current stock price is $20.The cost of equity of The Third Cup Company is:

• A)17%
• B)13%
• C)10%
• D)7%

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Definitions:

Compounded Annually

Refers to the process where interest earned on an investment is added to the principal, and the new total becomes the basis for computing interest in the next period.

Quadruple

To increase or to be increased fourfold.

Annual Growth Rate

The year-over-year increase in value of an investment, expressed as a percentage.

Compounded Annually

An interest calculation method where the interest earned each year is added to the principal, and the following year's interest is based on this new principal amount.