Epley Industries stock has a beta of 1.25. The company just paid a dividend of $

Question

Epley Industries stock has a beta of 1.25. The company just paid a dividend of $.40, and the dividends are expected to grow at 5 percent. The expected return on the market is 12 percent, and Treasury bills are yielding 5.8 percent. The most recent stock price for the company is $75. 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

a.Cost of equity=(Dividend for next period/current price)+Growth rate

=(0.4*1.05)/75+0.05=5.56%

b.cost of equity=Risk free rate+Beta*(MArket rate-Risk free rate)

=5.8+1.25*(12-5.8)=13.55%

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