Stock in Dragula Industries has a beta of 1.1. The market risk premium is 7 perc
ID: 2720591 • Letter: S
Question
Stock in Dragula Industries has a beta of 1.1. The market risk premium is 7 percent, and T-bills are currently yielding 5.20 percent. The company’s most recent dividend was $1.60 per share, and dividends are expected to grow at a 6.0 percent annual rate indefinitely.
If the stock sells for $40 per share, what is your best estimate of the company’s cost of equity? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Stock in Dragula Industries has a beta of 1.1. The market risk premium is 7 percent, and T-bills are currently yielding 5.20 percent. The company’s most recent dividend was $1.60 per share, and dividends are expected to grow at a 6.0 percent annual rate indefinitely.
Explanation / Answer
Cost of equity = Risk free return + Beta * Risk Premium = 5.20 % + 1.1* 7 % 12.90% Dividend Per share = $ 1.60 Dividend for next year = $ 1.60 * 106% $ 1.696 Value per share = D1/(ke-g) = 1.696/(12.9-6) 24.57971 Cost of equity when MPS is 40 = D1/MPS + G = (1.696/40) + 0.06 10.240%
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