Question

10 points eBookItem 17Item 17 10 points Stock in Daenerys Industries has a beta of 1.01. The market risk premium is 10 percent, and T-bills are currently yielding 3 percent. The company's most recent dividend was $1.6 per share, and dividends are expected to grow at a 6 percent annual rate indefinitely. If the stock sells for $33 per share, what is your best estimate of the company's cost of equity? rev: 09_20_2012

Answer 1

12.12%

Step-by-step explanation:

The computation of the best estimate of the company cost of equity is as follows;

The required rate of return as per CAPM Is

= Risk free rate of return + beta × market risk premium

= 3% + 1.01 × 10%

= 13.1%

Now

Dividend growth model (r) is

=(($1.60 × 1.06) ÷ $33) + 0.06

= 11.14%

Now the best estimate would be

= (13.1% + 11.14%) ÷ 2

= 12.12%