Berta Industries stock has a beta of 1.30. The company just paid a dividend of $

Question

Berta Industries stock has a beta of 1.30. The company just paid a dividend of $0.30, and the dividends are expected to grow at 4 percent. The expected return on the market is 13 percent, and Treasury bills are yielding 6.0 percent. The most recent stock price for Berta is $77.

Calculate the cost of equity using the DCF method. (Round your answer to 2 decimal places. (e.g., 32.16))

Calculate the cost of equity using the SML method. (Round your answer to 2 decimal places. (e.g., 32.16))

Berta Industries stock has a beta of 1.30. The company just paid a dividend of $0.30, and the dividends are expected to grow at 4 percent. The expected return on the market is 13 percent, and Treasury bills are yielding 6.0 percent. The most recent stock price for Berta is $77.

Explanation / Answer

a.

Dividend just paid = $0.30

Next dividend = $0.30 * 1.04 = $0.312

Price of share = $77

Cost of equity = (Dividend/ Price) + Growth rate = ($0.312 / $77) + 0.04 = 0.0041 + 0.04 = 0.0441 = 4.41%

b.

Cost of equity = Risk free rate of return + (Beta* Market risk premium)

Market risk premium = Market rate of return - Risk free rate of return = 0.13 – 0.06 = 0.07

Cost of equity = 0.06 + 1.30*0.07 = 0.151 = 15.10%

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