Stock in CDB Industries has a beta of .97. The market risk premium is 7.2 percen

Question

Stock in CDB Industries has a beta of .97. The market risk premium is 7.2 percent, and T-bills are currently yielding 4.2 percent. CDB?s most recent dividend was $2.60 per share, and dividends are expected to grow at a 5.2 percent annual rate indefinitely. The stock sells for $48 per share. Required: Using the CAPM, what is your estimate of CDB?s cost of equity? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Cost of equity % Using the dividend discount model, what is your estimate of CDB?s cost of equity? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Cost of equity % What is your best estimate of CDB?s cost of equity? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Cost of equity %

Explanation / Answer

CAPM Ke = Rf + Beta(Market Risk Premium Where Rf = risk free rate = 4.2% Beta = .97 Market risk premium = 7.2% ke = 4.2% + .97(7.2%) ke = 4.2% + 6.984% ke= 11.184% Dividend Growth ke = D1/P0 + g D1 is dividend to be paid P0= price at beginning = 48 g= growth rate = 5.2% D0 = 2.60 D1 = D0(1+g) =2.60(1.052) = 2.7352 ke= 2.7352/48 + 5.2% ke= 5.70% + 5.2% ke = 10.90% Best Estimate ke = (CAPM + Div Dis)/2 ke = (11.18%+ 10.90%)/2 ke = 11.04% ke= 11.04%

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