Alexis OHara is an equity analyst at Dave Associates, a financial services firm.

OHara is estimating the firms cost of equity using the dividend discount model

approach. She has learnt that the Gordons growth model is particularly useful in

deriving the required rate of return when this approach is used. The company has

paid a dividend of $2.5 per share in the previous year.

The current market price per share is $25. The companys retention rate and return on equity is 40% and 10%, respectively.

The cost of equity using the dividend discount model is closest to:

A. 14.00%.

B. 14.40%.

C. 16.40%.

D. 12.50%