Answer (D) is correct . Under the dividend growth model, the cost of equity equals the expected growth rate plus the quotient of the next dividend and the current market price. Thus, the cost of equity capital is 20% [10% + ($3 ¡Â $30)]. This model assumes that the payout ratio, retention rate, and the earnings per share growth rate are all constant.
Answer (A) is incorrect because The sum of the growth rate (10%) and the dividend incorrectly divided by the share price discounted one year equals 21.1%.
Answer (B) is incorrect because This is a bogus percentage.
Answer (C) is incorrect because The growth rate (10%) plus 10% of the current dividend yield (10%) equals 11.0%.
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