Question

Berta Industries stock has a beta of 1.25. The company just paid a dividend of $0.40, and the dividends are expected to grow at 5 percent. The expected return on the market is 12 percent, and Treasury bills are yielding 5.8 percent. The most recent stock price for Berta is $75. Calculate the cost of equity using the DCF method.

Answer 1

0.0556 or 5.57%

Step-by-step explanation:

Given that,

stock has a beta = 1.25

Dividend paid by company, D1 = $0.40

Expected growth rate of dividend, g = 5%

Expected return on the market, r = 12%

Treasury bills are yielding, t = 5.8%

Recent stock price for Berta, p = $75

Common stock (under DCF method):

`=(D1*(1+g))/(p)+g`

`=(0.4*(1+0.05))/(75)+0.05`

= 0.0056 + 0.05

= 0.0556 or 5.57%