Question

The market rate of return is 10.8 percent and the risk-free rate is 4.45 percent. Galaxy Co. has 17 percent more systematic risk than the overall market and has a dividend growth rate of 5.5 percent. The firm's stock is currently selling for $39 a share and has a dividend yield of 3.8 percent. What is the firm's cost of equity?

Answer 1

Average firm equity is 10.55 %

Step-by-step explanation:

Given data:

Rate of return is 10.8 %

risk free rate is 4.45%

systematic risk is 17%

Dividend rate is 5.5%

Cost of stock is $39 a share

Dividend yield is 3.8%

common stock (dividend growth) = dividend yield + dividend rate

= 0.038 + 0.055 = 0.093 = 9.30%

common stock ( CAPM) = risk free rate + 1.17 × ( rate of return - risk free rate)

common stock ( CAPM) = 0.0445 + 1.17 × (0.108 - 0.0445) = 0.118 = 11.8%

Average firm equity is =\frac{ 11.8 + 9.30}{2} = 10.55 %