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

Question

Epley Industries stock has a beta of 1.30. The company just paid a dividend of $.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 5.4 percent. The most recent stock price for the company is $71.

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.)

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.)

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.)

Explanation / Answer

a) DCF Method Growth rate ,g 4% Dividend just paid, D0                          0.30 D1 = .30 *1.04                        0.312 Price P0                        71.00 ke = D1/P0 + g ke = .312/71 + 4% ke= 4.44% b) SML Method Beta                          1.30 Return on Market, Rm 13% Risk free rate,Rf 5.40% ke = Rf + Beta(Rm-Rf) ke = 5.4% + 1.30(13%-5.4%) ke = 5.4% + 1.30(7.6%) ke = 5.4% + 9.88% ke = 15.28%

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