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 5.8 percent. The most recent stock price for Floyd is $75.

Calculate the cost of equity using the DDM method. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Calculate the cost of equity using the SML method. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

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 5.8 percent. The most recent stock price for Floyd is $75.

Explanation / Answer

a) DDM method Beta                                              1.25 Dividend Just Paid, D0                                              0.40 Growth rate, g 5% Dividend at end of year, D1 (.40*1.05) 0.42 Price,P0                                            75.00 Ke = D1/P0 + g Ke = .42/75 + 5% Ke = .56% + 5% Ke = 5.56%   b) SML Method Beta                                              1.25 Risk Free rate, Rf 5.80% Return on Market, Rm 12% Ke = Rf + Beta(Rm-Rf) Ke =5.8 + 1.25 (12-5.8)% Ke =5.8 + 1.25 (6.2)% Ke =5.8 + 7.75% Ke =13.55%

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