The global advertising company has a marginal tax rate of 40 percent. the last dividend paid by global was $0.90. global's common stock is selling for $8.59 per share, and its expected growth rate in earnings and dividends is 5 percent. what is global's cost of common stock?

(a) 12.22%
(b) 17.22%
(c) 10.33%
(d) 9.66%
(e) 16.00%

The correct answer is E: 16%

Explanation:

The cost of common stock is a common stockholders’ required rate of return. There are 3 methods to calculate the cost of common stock:

i- Dividend discount model or DMM

ii- Capital asset pricing model or CAPM

iii- Bond yield plus risk premium approach

Because of the information provided by the exercise, the correct method to use is de Dividend discount model.

Knowing the current market price of a stock and the last dividend paid, we can calculate the required rate of return, which is equal to the cost of common stock.

rs=(D1/P0)+g

D1= expected dividend

P0= current market price of the stock

g= dividend’s growth rate

To calculate D1 you need to use the following formula= D0x(1+g)

Using the exercise information:

D1=D0*(1+g)=0.90*1,05=0.945

P0=8.59

g=0,05

rs=(0.945/8.59)+0,05=0,16*100=16%

answer; ///(d); determining who competes most closely   with whom evaluating whether industry driving forces and competitive pressure favor some strategic groups and hurt others, and ascertaining whether the profit potential of different strategic groups varies due to the strengths and weaknesses in each groups respective market positions;