Floyd Industries stock has a beta of 1.2. The company just paid a dividend of $.

Question

Floyd Industries stock has a beta of 1.2. The company just paid a dividend of $.50, and the dividends are expected to grow at 6 percent per year. The expected return on the market is 11 percent, and Treasury bills are yielding 6.5 percent. The current price of the company's stock is $82.

a. Calculate the cost of equity using the DDM method. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

DDM method %

b. Calculate the cost of equity using the SML method. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

SML method %

Explanation / Answer

A)cost of equity using the DDM method =[D0(1+g)/price ]+g

                     = [.50 (1+.06) /82] + .06

                     = .50*1.06 /82 ] +.06

                     = .0065+.06

                    = .0665 or 6.65%

b)cost of equity using the SML method =Rf+ [beta (Rm-Rf)]

                      = 6.5 + [1.2 (11 -6.5)]

                       = 6.5 + [1.2 * 4.5]

                        = 6.5 + 5.4

                       = 11.90%

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