Stock in CDB Industries has a beta of 1.14. The market risk premium is 7.4 perce

Question

Stock in CDB Industries has a beta of 1.14. The market risk premium is 7.4 percent, and T-bills are currently yielding 4.4 percent. CDB’s most recent dividend was $3.80 per share, and dividends are expected to grow at a 5.4 percent annual rate indefinitely.

If the stock sells for $60 per share, what is your best estimate of CDB’s cost of equity? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

If the stock sells for $60 per share, what is your best estimate of CDB’s cost of equity? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Explanation / Answer

Ke = D1 / P0 + g

D1 = D0 [ 1+g]

= 3.80 [ 1 + 0.054]

= 3.80 [ 1.054] = 4

Ke = 4 / 60 + 0.054

= 12.1%.

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