When the CEO of Westmont Electronic Company wants to determine the cost of commo

Question

When the CEO of Westmont Electronic Company wants to determine the cost of common equity, she uses both the capital asset pricing model and the dividend valuation model. Assume:

Rf= 8%

Km= 13%

?= 1.7%

D1= $0.90

P0= $20

g= 9%

1. Compute Ki (required rate of return on common equity based on the capital asset pricing model). Answer as a percent rounded to 2 decimal places.

2. Compute Ke (required rate of return on common equity based on the dividend valuation model). Answer as a percent rounded to 2 decimal places.

Explanation / Answer

1.Required return=Risk free rate+Beta*(MArket rate-Risk free rate)

=8+1.7(13-8)

=16.5%

2.Required return=(Dividend for next period/Current price)+Growth rate

=(0.9/20)+0.09

=13.5%

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.