Berta Industries stock has a beta of 1.20. The company just paid a dividend of $

Question

Berta Industries stock has a beta of 1.20. The company just paid a dividend of $0.50, and the dividends are expected to grow at 6 percent. The expected return on the market is 11 percent, and Treasury bills are yielding 6.2 percent. The most recent stock price for Berta is $79.

Calculate the cost of equity using the DCF method

Calculate the cost of equity using the SML method

Berta Industries stock has a beta of 1.20. The company just paid a dividend of $0.50, and the dividends are expected to grow at 6 percent. The expected return on the market is 11 percent, and Treasury bills are yielding 6.2 percent. The most recent stock price for Berta is $79.

Explanation / Answer

CALCULATION OF COST OF EQUITY USING DCF METHOD

COST OF EQUITY = [DIV(AT ZERO PERIOD) + GROWTH RATE / pRICE (AT ZERO PERIOD) ] + GROWTH RATE

= 0.5 (1 + 0.06) / 79 + 6%

= 6.67%

CALCULATION OF COST OF EQUITY USING SML METHOD :

Cost of Equity (Re) = Rf + Beta (Rm-Rf).

Rf = Risk free return = 6.2%

beta = 1.2

Rm = 11 %

Cost of equity = 6.2 + 1.2 ( 11 - 6.2) = 11.96 %

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