Aec company issues common stock that is expected to pay a dividend over the next year of $2 at a stock price of $20 per share today. if its wacc is 12% and the company is financed by 30% debt and 70% equity, calculate the expected growth rate of dividend (=g), given the cost of debt is 5% and tax rate is 0%?

a) 5.0%

b) 7.0%

c) 9.0%

d) 12.0%

A) 5.0%

Explanation:

AEC Company expects to pay a dividend over the next year of $2 at a stock price of $20 per share, thus the dividend rate over next year = $2/ $20 = 10%

The WACC is 12%, the company is financed by 30% debt and 70% equity, and the cost of debt is 5%;

WACC 12%= 30% x cost of debt 5% + 70% x cost of equity  

->Cost of equity = (12% -30%*5%)/70% = 15%

Thus expected growth rate of dividend = Cost of equity 15% - dividend rate over next year 10% = 5%

income statement is prepared in order to show the profits and loss of a business. in order to prepare the income statement she should collect all the income and expenses of the product with the cost of production.

the correct answer will be d