Laverne Industries stock has a beta of 1.34. The company just paid a dividend of

Question

Laverne Industries stock has a beta of 1.34. The company just paid a dividend of $.84, and the dividends are expected to grow at 5.4 percent. The expected return of the market is 11.9 percent, and Treasury bills are yielding 5.4 percent. The most recent stock price is $83.25.

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).)

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).)

Laverne Industries stock has a beta of 1.34. The company just paid a dividend of $.84, and the dividends are expected to grow at 5.4 percent. The expected return of the market is 11.9 percent, and Treasury bills are yielding 5.4 percent. The most recent stock price is $83.25.

Explanation / Answer

a)

Price = recent dividend* ( 1 + growth rate )/( cost of equity - growth rate)

83.25 = 0.84 * (1 + .054)/(cost of equity - 0.054)

= 6.46%

b) expected return = risk-free rate + beta * (expected return on the market - risk-free rate)

= 5.4+1.34*(11.9-5.4) = 14.11%

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