Using the Constant Growth Model, a Firm's Expected Dividend Yield

question 60

Multiple Choice

Using the constant growth model, a firm's expected dividend yield (D₁) is 4% of the stock price, and its growth rate is 5%. If the tax rate is 35%, what is the firm's cost of equity?

• A) 10%
• B) 6.65%
• C) 9.0%
• D) 5.85%

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Definitions:

Fixed Cost

A cost that remains constant, regardless of changes in the level of production or sales activities.

Factory Supervisor

An individual responsible for overseeing the production process and workers in a manufacturing setting.

Merchandising Company

A merchandising company is a business that purchases finished products and sells them to consumers, without altering the product's form.

Fixed Cost

Expenses that do not change with the level of production or sales, such as rent, salaries, and insurance premiums.