Question

Jackson's Home Cookin just paid its annual dividend of $0.65 a share. The stock has a market price of $13.00 and a beta of 1.12. The return on US Treasury bills is 2.5% and the market risk premium is 6.8%. What is the firm's cost of equity

Answer 1

10%

Step-by-step explanation:

The firm cost of equity is the return that is required by providers of Common Stock. This can be calculated in two ways. The first option is to use the Dividend Growth Model and the other option is to use the Capital Asset Pricing Model (CAPM).

The information given in the question is not sufficient to use the Dividend Growth Model since we have not been told the growth percentage in dividends.

We will thus use the Capital Asset Pricing Model (CAPM) as follows :

Cost of Equity = Return of Risk free Securities + Beta × Market Risk Premium

Therefore,

Cost of Equity = 2.5% + 1.12 × 6.8%

= 10%