Laverne Industries stock has a beta of 1.30. The company just paid a dividend of
ID: 2751135 • Letter: L
Question
Laverne Industries stock has a beta of 1.30. The company just paid a dividend of $.80, and the dividends are expected to grow at 5 percent. The expected return of the market is 11.5 percent, and Treasury bills are yielding 5 percent. The most recent stock price is $82.25.
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).)
Cost of equity:
Calculate the cost of equity using the SML method. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Cost of equity:
Laverne Industries stock has a beta of 1.30. The company just paid a dividend of $.80, and the dividends are expected to grow at 5 percent. The expected return of the market is 11.5 percent, and Treasury bills are yielding 5 percent. The most recent stock price is $82.25.
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).)
Cost of equity:
(b)Calculate the cost of equity using the SML method. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Cost of equity:
Explanation / Answer
a)
Do= 0.80
G= 5%
P = 82.25
Cost of equity = Do x (1+g)/P + g
=0.80 x(1+0.05)/82.25 +0.05
= 6.02%
b)
B= 1.30
Rm= 11.50%
Rf= 5%
Cost of equity = Rf + (Rm- Rf) x beta
= 0.05 + (0.115 – 0.05)x1.30
= 13.45%
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