Berta Industries stock has a beta of 1.30. The company just paid a dividend of $

Question

Berta Industries stock has a beta of 1.30. The company just paid a dividend of $0.30, and the dividends are expected to grow at 4 percent. The expected return on the market is 13 percent, and Treasury bills are yielding 5.4 percent. The most recent stock price for Berta is $71.

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 1.30. The company just paid a dividend of $0.30, and the dividends are expected to grow at 4 percent. The expected return on the market is 13 percent, and Treasury bills are yielding 5.4 percent. The most recent stock price for Berta is $71.

Explanation / Answer

a. Using DCF method,

Cost of equity = (D/ P) + G

D = Dividend per share to be received next year = $0.30 + ($0.30 X 4%) = $0.312

P = Price per share of a stock = $71

G = Constant annual growth rate in dividend per share = 4%

Cost of equity = ($0.312/$71) + 4% = 4.44%

b. Using SML method,

Cost of equity = Rf + Beta (Rm-Rf)

Rf = Risk-free rate = 5.4%

Beta = 1.3

Rm = Market return = 13%

Cost of equity = 5.4% + (1.3 X (13% - 5.4%)) = 15.28%

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