Laverne Industries stock has a beta of 1.33. The company just paid a dividend of
ID: 2750437 • Letter: L
Question
Laverne Industries stock has a beta of 1.33. The company just paid a dividend of $.83, and the dividends are expected to grow at 5.3 percent. The expected return of the market is 11.8 percent, and Treasury bills are yielding 5.3 percent. The most recent stock price is $83.00.
Calculate the cost of equity using the dividend growth model method. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Calculate the cost of equity using the SML method
Required: (a)Calculate the cost of equity using the dividend growth model method. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Explanation / Answer
Cost of equity usig dividend growth model
P0 = D1/Ke-G
83 = 0.83(1.053)/Ke-0.053
83(Ke - 0.053) = 0.87399
83Ke- 4.399= 0.87399
83Ke = 0.87399+4.399
Ke = 5.273/83 i.e 6.35%
Cost of equity using sml method
= Risk free return + Beta * Market risk premium
=5.3%+ 1.33( 11.8-5.3)
= 5.3+8.645 i.e 13.945%
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