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

Question

Floyd Industries stock has a beta of 1.25. The company just paid a dividend of $.40, and the dividends are expected to grow at 5 percent per year. The expected return on the market is 12 percent, and Treasury bills are yielding 5.0 percent. The most recent stock price for Floyd is $67. a. Calculate the cost of equity using the DDM method. (Round your answer to 2 decimal places. (e.g., 32.16)) DCF method % b. Calculate the cost of equity using the SML method. (Round your answer to 2 decimal places. (e.g., 32.16)) SML method %

Explanation / Answer

Floyd Industries stock has a beta of 1.25. The company just paid a dividend of $.40, and the dividends are expected to grow at 5 percent per year. The expected return on the market is 12 percent, and Treasury bills are yielding 5.0 percent. The most recent stock price for Floyd is $67.

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

As per DDM Method

Cost of Equity = Expected Dividend/Current Share Price + growth rate

Cost of Equity = (0.40*1.05)/67 + 0.05

Cost of Equity = 0.0563

Cost of Equity = 5.63%

Answer

DDM method 5.63 %

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

As per SML Method

Cost of Equity = Rf + (Rm-Rf)*beta

Cost of Equity = 5 + (12-5)*1.25

Cost of Equity = 13.75%

Answer

SML method 13.75 %

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