Epley Industries stock has a beta of 1.20. The company just paid a dividend of $

Question

Epley Industries stock has a beta of 1.20. The company just paid a dividend of $.50, and the dividends are expected to grow at 6 percent. The expected return on the market is 11 percent, and Treasury bills are yielding 5.6 percent. The most recent stock price for the company is $73. a. Calculate the cost of equity using the DCF method. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) DCF method % b. Calculate the cost of equity using the SML method. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) SML method %

Explanation / Answer

1) Cost of equity =D1/P0+g

D1 is next years dividend

P0 is latest stock price

and g is growth rate

Cost of equity= 0.50*(1+6%)/73+6%

=0.0673

Cost of equity=6.73%

2) Cost of equity=rf+Beta*(Market Return-rf)

=5.6%+1.2*(11%-5.6%)

=12.08%

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