Floyd Industries stock has a beta of 1.27. The company just paid a dividend of $

Question

Floyd Industries stock has a beta of 1.27. The company just paid a dividend of $0.70, and the dividends are expected to grow at 5 percent. The expected return of the market is 15 percent, and Treasury bills are yielding 7 percent. The most recent stock price for Floyd is $51.

Requirement 1: Calculate the cost of equity using the DDM method. (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16)) Cost of equity_________ %

Requirement 2: Calculate the cost of equity using the SML method. (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16)) Cost of equity__________%

Explanation / Answer

1.cost of equity using the DDM method=(Dividend for next period/current price)+Growth rate

=(0.7*1.05)/51+0.05

6.44%

2.cost of equity using the SML method.=Risk free rate+Beta*(Market rate-Risk free rate)

=7+1.27*(15-7)

=17.16%

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