Berta Industries stock has a beta of 1.25. The company just paid a dividend of $

Question

Berta Industries stock has a beta of 1.25. The company just paid a dividend of $0.40, and the dividends are expected to grow at 5 percent. The expected return on the market is 12 percent, and Treasury bills are yielding 5.0 percent. The most recent stock price for Berta is $67.

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 1.25. The company just paid a dividend of $0.40, and the dividends are expected to grow at 5 percent. The expected return on the market is 12 percent, and Treasury bills are yielding 5.0 percent. The most recent stock price for Berta is $67.

Explanation / Answer

a)

Stock price = D1÷(r-g)

D1 is next expected dividend

r is required return

g is growth rate

$67 = $0.40×(1+5%)÷(r-5%)

Cost of equity, r = 5.63%

b)

Expected return = Rf+×Rp

Rf is risk free return

Rp is risk premium

= 5%+1.25×(12%-5%)

= 13.75%

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