Stock in CDB Industries has a beta of 1.13. The market risk premium is 7.3 perce

Question

Stock in CDB Industries has a beta of 1.13. The market risk premium is 7.3 percent, and T-bills are currently yielding 4.3 percent. CDB’s most recent dividend was $3.70 per share, and dividends are expected to grow at an annual rate of 5.3 percent indefinitely.

If the stock sells for $59 per share, what is your best estimate of the company's cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
  
Cost of equity             %

Explanation / Answer

Cost of equity using dividend growth model=(Dividend for next period/Current price)+Growth rate

=(3.7*1.053)/59+0.053=11.9035593%

Cost of equity using CAPM=Risk free rate+Beta*MArket risk premium

=4.3+(1.13*7.3)=12.549%

Best estimate of Cost of equity=
(11.9035593+12.549)/2

=12.23%(Approx)

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