Question

Stock in country Road Industries has a beta of 1.46. The market risk premium is 7.5 percent while T-bills are currently yielding 2.5 percent. Country Road's last dividend was $1.55 per share and dividends are expected to grow at an annual rate of 4.5 percent indefinitely. The stock sells for $26 a share. What is the estimated cost of equity?

a. 11.96 percent
b. 13.45 percent
c. 10.73 percent
d. 12.09 percent
e. 10.46 percent

Answer 1

b. 13.45 percent

Step-by-step explanation:

We can use the CAPM method to find the cost of equity, according to CAPM

cost of equity = Risk free Rate +Beta(market risk premium)

cost of equity = 2.5+1.46(7.5)

cost of equity=13.45