Berta Industries stock has a beta of 1.25. The company just paid a dividend of $

Question

Berta Industries stock has a beta of 1.25. The company just paid a dividend of $0.40, and the dividends are expected to grow at 5 percent. The expected return on the market is 12 percent, and Treasury bills are yielding 4.7 percent. The most recent stock price for Berta is $64.

Calculate the cost of equity using the DCF method. (Round your answer to 2 decimal places. (e.g., 32.16))

Calculate the cost of equity using the SML method. (Round your answer to 2 decimal places. (e.g., 32.16))

Berta Industries stock has a beta of 1.25. The company just paid a dividend of $0.40, and the dividends are expected to grow at 5 percent. The expected return on the market is 12 percent, and Treasury bills are yielding 4.7 percent. The most recent stock price for Berta is $64.

Explanation / Answer

A) Using Discounted cash flow method 0.40*(1.05) = 64 Re - .05 Re = 5.65% B) Rf = 4.7% Beta = 1.25 Expected return = Rf+ (Rm - Rf)*B 4.7+(12-4.7)*1.25 13.83%

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