Question

Stock in CDB Industries has a beta of .97. The market risk premium is 7.2 percent, and T-bills are currently yielding 4.2 percent. The most recent dividend was $2.60 per share, and dividends are expected to grow at an annual rate of 5.2 percent indefinitely. If the stock sells for $48 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.)

Answer 1

Answer:

11.04%

Explanation:

Using CAMP

Cost of Equity= Risk Free rate +Beta *Market risk Premium

= 4.2% + 0.97 *7.2%

= 11.18%

Using Dividend Discount Model:

Cost of Equity = (D1 / P0)+g

g= Growth rate =5.2% =0.052

D1 = Current Dividend * (1+g) = 2.60 * (1 +0.052) = 2.7352

P0 = Current Price =$48

Hence Cost of Equity = (2.7352 /48) + 0.052

=0.10898

=10.90%

Average Cost of Equity = (11.18+ 10.9 )/ 2  = 11.04%