Epley Industries stock has a beta of 1.25. The company just paid a dividend of $

Question

Epley Industries stock has a beta of 1.25. The company just paid a dividend of $.40, and the dividends are expected to grow at 5 percent. The expected return on the market is 12 percent, and Treasury bills are yielding 5.3 percent. The most recent stock price for the company is $70.

Calculate the cost of equity using the DCF method. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Calculate the cost of equity using the SML method. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Epley Industries stock has a beta of 1.25. The company just paid a dividend of $.40, and the dividends are expected to grow at 5 percent. The expected return on the market is 12 percent, and Treasury bills are yielding 5.3 percent. The most recent stock price for the company is $70.

Explanation / Answer

a)cost of equity =[ D0(1+growth )/ current pricw]   +growth

                        = [.40 (1+.05) / 70 ] + .05

                       = [ ..42 / 70 ] + .05

                       = .006 +.05

                      = .056 or 5.60%

B)cost of equity = Rf +Beta (Rm-Rf)

                        = 5.3 + 1.25 (12 -5.3 )

                        = 5.3 + 1.25 *6.70

                       = 5.3 + 8.375

                       = 13.675 % or 13.68%(approx)

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