Question

Stock in CDB Industries has a beta of 1.14. The market risk premium is 7.4 percent, and T-bills are currently yielding 4.4 percent. The most recent dividend was $3.80 per share, and dividends are expected to grow at an annual rate of 5.4 percent indefinitely. The stock sells for $60 per share. Using the CAPM, what is your estimate of the company's cost of equity?

Answer 1

Using the CAPM, the cost of equity for CDB Industries is estimated to be 12.836%, calculated by adding the risk-free rate of 4.4% to the product of its beta (1.14) and the market risk premium (7.4%).

Step-by-step explanation:

The cost of equity for a company can be estimated using the Capital Asset Pricing Model (CAPM), which takes into account the risk-free rate, the equity beta, and the market risk premium. The CAPM formula is:

Cost of Equity = Risk-Free Rate + Beta * Market Risk Premium

Given that CDB Industries has a beta of 1.14, the current yield on T-bills is 4.4 percent (the risk-free rate), and the market risk premium is 7.4 percent, we can calculate the cost of equity as follows:

Cost of Equity = 4.4% + 1.14 * 7.4%

By substituting the given values and calculating:

Cost of Equity = 4.4% + 1.14 * 7.4% = 4.4% + 8.436% = 12.836%.

Therefore, the estimated cost of equity for CDB Industries using CAPM is 12.836% percent.

Answer 2

7.82%

Step-by-step explanation:

In CAPM (capital asset pricing model), cost of equity = Risk free rate of return + Beta × (market rate of return – risk free rate of return)

T-bill is treasury bill backed up by governement, then cosidered is risk free rate.

Using the CAPM, the company's cost of equity = T-bills yielding 4.4% + beta 1.14 x (market risk premium 7.4% - T-bills yielding 4.4%)

= 4.4% +1.14*(7.4%-4.4%) = 7.82%