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 4.5 percent. The most recent stock price for the company is $62.

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.)

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 4.5 percent. The most recent stock price for the company is $62.

Explanation / Answer

A.Cost of equity using DCF is D1/P0 + growth rate =0.3× 1.04/62 + 4% = 4.5%, D1 is divedent at end of next year, p0 is current price.

Assumed the divedend of 0.3$ is annual divedend.

B.The SML equation is Re = risk free rate + beta×(return on market - Risk free rate)

=4.5% + 1.3×(13%-4.5%) = 15.55%

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