Part C: Bonus Questions. Please show all the necessary steps to prove your answe

Question

Part C: Bonus Questions. Please show all the necessary steps to prove your answer. If not, no partial credit will be given 1. Stock in Country Road Industries has a beta of 1.46. The market risk premium is 7.5 percent while T-bills are currently yielding 2.5 percent. Country Road's last dividend was $1.55 per share and dividends are expected to grow at an annual rate of 4.5 percent indefinitely. The stock sells for $26a share. What is the estimated cost of equity using the average return of the CAPM and the dividend discount model?

Explanation / Answer

Using CAPM, Cost of equity = Rf + beta x MRP

= 2.5% + 1.46 x 7.5% = 13.45%

Using dividend discount model,

Cost of equity = D0 x (1 + g) / P + g = 1.55 x 1.045 / 26 + 4.5% = 10.73%

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