Question

Stock in Daenerys Industries has a beta of 1.3. The market risk premium is 6 percent, and T-bills are currently yielding 5 percent. The company’s most recent dividend was $2.00 per share, and dividends are expected to grow at an annual rate of 8 percent indefinitely. If the stock sells for $36 per share, what is your best estimate of the company’s cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

13.4%

Step-by-step explanation:

According to the scenario, computation of the given data are as follows:-

Div1 = Dividend Price Per Share × (1 + G)

= $2 × (1 + 8%) = $2 × (1 + 0.08) = $2 × 1.08

= $2.16

As Per Growth Model Cost of Equity = (Div1 ÷ Current Price) +Growth Rate

= ( 2.16 ÷ $36) + 0.08 = 0.06 + 0.08 = 0.14 Or 14%

As Per CAPM Cost of Equity = Risk Free Rate + (Beta × Market Risk Premium)

= 5 + (1.3 × 6) = 5% + 7.8%

= 12.8%

Best Estimate of the Company’s Cost of Equity = (As Per Growth Model Cost of Equity + As Per CAPM Cost of Equity) ÷ 2

= (14% + 12.8%) ÷ 2

= 26.8% ÷ 2

= 13.4%