Berta Industries stock has a beta of 1.20. The company just paid a dividend of $

Question

Berta Industries stock has a beta of 1.20. The company just paid a dividend of $0.50, and the dividends are expected to grow at 6 percent. The expected return on the market is 11 percent, and Treasury bills are yielding 4.9 percent. The most recent stock price for Berta is $66.

Calculate the cost of equity using the DCF method.

Calculate the cost of equity using the SML method.

Berta Industries stock has a beta of 1.20. The company just paid a dividend of $0.50, and the dividends are expected to grow at 6 percent. The expected return on the market is 11 percent, and Treasury bills are yielding 4.9 percent. The most recent stock price for Berta is $66.

Explanation / Answer

a) r = [ D(0)*(1+g)/P ] + g = [ 0.5*1.06/66 ] + 0.06 = 0.068 = 6.8%

b) r = RFR + Beta*(MR - RFR) = 0.049 + 1.2*(0.11-0.049) = 0.1222 = 12.22%

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