Excel Cost of common stock: Whitewall Tire Co. just paid a $1.60 dividend on its common shares. If Whitewall is expected to increase its annual dividend by 2 percent per year into the foreseeable future and the current price of Whitewall common shares is $11.66, what is the cost of common stock for Whitewall

The cost of equity is 16%

Explanation:

The annual rate of return that an investor expects to earn when investing in shares of a company is known as the cost of common equity.

Price of stock = Next dividend / I-g

i = rate of return

g =  growth rate

Since Whitewall Tire co. just paid $1.60 dividend, the next dividend will be 1.60(1.02)

11.66 = 1.60(1.02) / (i - 0.02)

We solve for i

i = {1.60(1.02) / 11.66}+ 0.02

i = 0.16

i = 16%

Therefore, the cost of equity is 16%