Question

stock in cdb industries has a beta of 1.10. the market risk premium is 7.8 percent, and t-bills are currently yielding 3.5 percent. cdb's most recent dividend was $2.35 per share, and dividends are expected to grow at an annual rate of 5 percent indefinitely. if the stock sells for $45 per share, what is your best estimate of the company's cost of equity using the capm?

Answer 1

CDB Industries' estimated cost of equity is 12.08%, calculated using the CAPM formula by adding the risk-free rate (3.5%) to beta (1.10) multiplied by the market risk premium (7.8%).

Step-by-step explanation:

To estimate CDB Industries' cost of equity using the CAPM (Capital Asset Pricing Model), we can use the formula: Cost of Equity = Risk-Free Rate + Beta * Market Risk Premium. Here, the risk-free rate is the yield on T-bills, which is given as 3.5%. CDB's beta is 1.10, and the market risk premium is 7.8%. By inserting these values into the formula, we get:

Cost of Equity = 3.5% + 1.10 * 7.8%

To find the percentage, we calculate 1.10 * 7.8% = 8.58%, and then add the risk-free rate to get 3.5% + 8.58% = 12.08%.

Thus, based on the CAPM, the company's cost of equity is 12.08%.