Kinston Nielson Motors has a share price of $25 today. If Nielson Motors is expected to...

Kinston Nielson Motors has a share price of $25 today. If Nielson Motors is expected to pay a dividend of $0.75 this year, and its stock price is expected to grow to $26.75 at the end of the year, then Nielson's dividend yield and equity cost of capital are:

	a.	3.0% and 7.0% respectively.
	b.	4.0% and 6.0% respectively.
	c.	3.0% and 10.0% respectively.
	d.	None of the answers are correct.
	e.	4.0% and 10.0% respectively.

Expert Solution

Dividend Yield = Current Year Dividend/Current Market Price = 0.75/25 = 3%

Growth rate = (26.75 - 25)/25 = 7%

Current Market Price by end of year = Future Dividend / ( equity cost of capital - growth)

=> 26.75 = 0.75*1.07/(cost of capital - 0.07)

=> Cost of capital = 10%

So the answer is option c

jeff jeffy answered 2 years ago

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