Stock in CDB Industries has a beta of .97. The market risk premium is 7.2 percen

Question

Stock in CDB Industries has a beta of .97. The market risk premium is 7.2 percent, and T-bills are currently yielding 4.2 percent. CDB?s most recent dividend was $2.60 per share, and dividends are expected to grow at a 5.2 percent annual rate indefinitely. The stock sells for $48 per share. Required: Using the CAPM, what is your estimate of CDB?s cost of equity? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Cost of equity % Using the dividend discount model, what is your estimate of CDB?s cost of equity? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Cost of equity % What is your best estimate of CDB?s cost of equity? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Cost of equity %

Explanation / Answer

Answer:

Calculation of Cost of Equity Using CAPM:

Cost of Equity= Risk Free rate +Beta *Market risk Premium

= 4.2% + 0.97 *7.2%

= 11.18%

Calculation of Cost of Equity Using Dividend Discount Model:

Cost of Equity = (D1 / P0)+g

g= Growth rate =5.2% =0.052

D1 = Current Dividend * (1+g) = 2.60 * (1 +0.052) = 2.7352

P0 = Current Price =$48

Hence Cost of Equity = (2.7352 /48) + 0.052

=0.10898

=10.90%

Average Cost of Equity = (11.18+ 10.9 )/ 2

=11.04%

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.