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 6.3 percent. The most recent stock price for Berta is $80.

Calculate the cost of equity using the DCF method.

Calculate the cost of equity using the SML method.

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 6.3 percent. The most recent stock price for Berta is $80.

Calculate the cost of equity using the DCF method.

Calculate the cost of equity using the SML method.

Explanation / Answer

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 6.3 percent. The most recent stock price for Berta is $80.

a. Calculate the cost of equity using the DCF method.

Cost of equity= Expected Dividend / Price + Growth rate

Cost of equity= 0.30*1.04/80 + 0.04 = 0.0439

Cost of equity= 4.39%

b.Calculate the cost of equity using the SML method.

Cost of equity = 6.30 + (13-6.30)1.30 = 15.01%

a. Calculate the cost of equity using the DCF method.

Cost of equity= Expected Dividend / Price + Growth rate

Cost of equity= 0.30*1.04/80 + 0.04 = 0.0439

Cost of equity= 4.39%

b.Calculate the cost of equity using the SML method.

Cost of equity = 6.30 + (13-6.30)1.30 = 15.01%

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