Question

Laverne industries stock has a beta of 1.15. the company just paid a dividend of $.95, and the dividends are expected to grow at 4 percent. the expected return of the market is 11.5 percent, and treasury bills are yielding 3.8 percent. the most recent stock price is $81. required:

calculate the cost of equity using the dividend growth model method. (do not round intermediate calculations. enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) cost of equity %____

Answer 1

To calculate the cost of equity using the dividend growth model method, you can use the formula: Cost of Equity = (Dividend / Stock Price) + Growth Rate. Plug in the values given and calculate to find the cost of equity as a percentage.

Step-by-step explanation:

To calculate the cost of equity using the dividend growth model method, we can use the formula:

Cost of Equity = (Dividend / Stock Price) + Growth Rate

Given that the dividend is $0.95, the stock price is $81, and the growth rate is 4%, we can plug these values into the formula:

Cost of Equity = ($0.95 / $81) + 0.04

Calculating this equation will give us the cost of equity as a percentage, rounded to 2 decimal places.

The cost of equity represents the compensation the market demands in exchange for owning the asset and bearing the risk. In CAPM (Capital Asset Pricing Model), the cost of equity is calculated by adding the bond yield (Risk-free rate) to the product of the equity's beta and the market risk premium (Bond yield plus risk premium). However, in the DCF (Discounted Cash Flow) model, the cost of equity is calculated by discounting the expected future dividends or expected future cash flows of the company.

Without information on the company's cash flows, dividends, or beta, it is difficult to provide a best estimate for the firm's cost of equity. Regardless, the firm's cost of equity is an essential component of financial analysis and decision-making.