3. value: 1.00 points Stock in CDB Industries has a beta of 1.08. The market ris

Question

3. value: 1.00 points Stock in CDB Industries has a beta of 1.08. The market risk premium is 7.3 percent, and T-bills are currently yielding 4.3 percent. CDB's most recent dividend was $3.20 per share, and dividends are expected to grow at an annual rate of 5.3 percent indefinitely If the stock sells for $54 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

=(3.2*1.053)/54+0.053

=11.54%

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

=4.3+1.08*7.3

=12.184%

Hence best estimate of cost of equity=(11.54+12.184)/2

=11.86%(Approx).

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