Question

Southern Bakeries just paid its annual dividend of $.48 a share. The stock has a market price of $17.23 and a beta of .93. The return on the U.S. Treasury bill is 3.1 percent and the market risk premium is 7.6 percent. What is the cost of equity?

Answer 1

Answer:

10.17%

Explanation:

Use Capital Asset Pricing Model (CAPM) to find the cost of equity; the required rate of return by investors if they choose to buy Southern Bakeries' stock.

CAPM ;r = risk free +Beta(Market risk premium)

risk free = 3.1% or 0.031 as a decimal

Beta = 0.93

Market risk premium = 7.6% or 0.076 as a decimal

CAPM ; r = 0.031 + 0.93 (0.076)

r =  0.031 + 0.07068

r = 0.10168

CAPM rate of return is 10.17%

Therefore, Southern Bakeries' cost of equity = 10.17%