Question

Southern home cookin' just paid its annual dividend of £0.65 a share. the stock has a market price of £13 and a beta of 1.12. the return on the treasury bill is 2.5 per cent and the market risk premium is 6.8 per cent. what is the cost of equity

Answer 1

The cost of equity for Southern home cookin' using the Capital Asset Pricing Model (CAPM) is computed to be 10.116%, using the given annual dividend, market price, beta, risk-free rate, and market risk premium.

Step-by-step explanation:

The student has asked about how to calculate the cost of equity for a company named Southern home cookin'. To answer the question, one would typically use the Capital Asset Pricing Model (CAPM), which is a method that estimates the cost of equity or the return that investors require for making an equity investment in a company.

The formula for CAPM is:

Cost of Equity = Risk-Free Rate + (Beta × Market Risk Premium)

Given the information, the cost of equity can be calculated as follows:

• Risk-Free Rate (Rf): 2.5%
• Beta (): 1.12
• Market Risk Premium (Rm - Rf): 6.8%

Plugging these values into the CAPM formula provides:

Cost of Equity = 2.5% + (1.12 × 6.8%) = 2.5% + 7.616% = 10.116%