Stock in Country Road Industries has a beta of 1.18. The market risk premium is

Question

Stock in Country Road Industries has a beta of 1.18. The market risk premium is 8 percent, and T-bills are currently yielding 3 percent. The company's most recent dividend was $1.9 per share, and dividends are expected to grow at a 5.5 percent annual rate indefinitely. If the stock sells for $37 per share, what is your best estimate of the company's cost of equity? (Do not round your intermediate calculations.)

10.92%

10.11%

12.44%

11.68%

8.9%

Stock in Country Road Industries has a beta of 1.18. The market risk premium is 8 percent, and T-bills are currently yielding 3 percent. The company's most recent dividend was $1.9 per share, and dividends are expected to grow at a 5.5 percent annual rate indefinitely. If the stock sells for $37 per share, what is your best estimate of the company's cost of equity? (Do not round your intermediate calculations.)

Explanation / Answer

your best estimate of the company's cost of equity using CAPM = 3% + 1.18*8% = 12.44%

your best estimate of the company's cost of equity using DDM = 1.9*1.055/37 + 5.5% = 10.9176%

taking average of the two, cost of equity = 12.44% + 10.9176%/2 = 11.68%

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