Stock in Dragula Industries has a beta of 1.3. The market risk premium is 6 perc

Question

Stock in Dragula Industries has a beta of 1.3. The market risk premium is 6 percent, and T-bills are currently yielding 4.30 percent. The company’s most recent dividend was $1.50 per share, and dividends are expected to grow at a 8.0 percent annual rate indefinitely. If the stock sells for $45 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)) Cost of equity % (the answer is NOT 11.6)

Explanation / Answer

Cost of equity using CAPM

Cost of equity Ke = Rf + MRP x beta

                                   = 0.043 + 0.06 x 1.30

                                   = 12.10%

Cost of equity using DDM

Ke = Do x(1+g)/P + g

      = 1.50 x(1+0.08)/ 45 +0.08

      = 0.036 +0.08

      = 11.60%

Best estimate of Ke = (12.10% + 11.60%)/2

                                      = 11.85%

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

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