Epley Industries stock has a beta of 1.30. The company just paid an annual divid

Question

Epley Industries stock has a beta of 1.30. The company just paid an annual dividend of $.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 5.7 percent. The most recent stock price for the company is $74.

Calculate the cost of equity using the discounted cash flow method (Chapter 6). (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 Security Market Line (Chapter 13). (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Epley Industries stock has a beta of 1.30. The company just paid an annual dividend of $.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 5.7 percent. The most recent stock price for the company is $74.

Explanation / Answer

Calculate the cost of equity using the discounted cash flow method

=D1/Stock price +growth

=D1=(.30*(1+.04))

=(.30*(1+.04))/74+4%

cost of equity=4.42%

Calculate the cost of equity using the Security Market Line

=rf+beta*(RM-RF)

=5.7%+1.30*(13%-5.7%)

=15.19%

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