Question

ossdale Co. stock currently sells for $72.65 per share and has a beta of 1.21. The market risk premium is 7.20 percent and the risk-free rate is 2.94 percent annually. The company just paid a dividend of $4.25 per share, which it has pledged to increase at an annual rate of 3.55 percent indefinitely. What is your best estimate of the company's cost of equity?

Answer 1

Answer:

10.63%

Explanation:

(1) Current share price = $72.65

current dividend = $4.25

Growth rate = 3.55%

Cost of equity:

= {[Current dividend (1 + Growth rate)] ÷ Price} + Growth rate

= {[$4.25(1 + 3.55%)] ÷ $72.65} + 3.55%

= 9.607639%

(2) Risk free rate = 2.94%

Market risk premium = 7.20%

Beta = 1.21

Cost of equity:

= Risk free rate + (Beta × Market risk premium)

= 2.94% + (1.21 × 7.20%)

= 11.65200%

Average cost of equity = (9.607639% + 11.65200%) ÷ 2

                                      = 10.62982%

Therefore, the best estimate of the company's cost of equity is 10.63%.