Laverne Industries stock has a beta of 1.41. The company just paid a dividend of

Question

Laverne Industries stock has a beta of 1.41. The company just paid a dividend of $0.91, and the dividends are expected to grow at 5.1 percent. The expectedreturnof the market is 11.6 percent, and Treasury bills are yielding 5.1 percent. The most recent stock price is $85.00.

Calculate the cost of equity using the dividend growth model method.(Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).)

Calculate the cost of equity using the SML method.(Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).)

Laverne Industries stock has a beta of 1.41. The company just paid a dividend of $0.91, and the dividends are expected to grow at 5.1 percent. The expectedreturnof the market is 11.6 percent, and Treasury bills are yielding 5.1 percent. The most recent stock price is $85.00.

Explanation / Answer

a.

P= D1/(Ke-g)

85= .91x1.051/(Ke-.051)

Ke=6.225%

b.

Ke= Rf+beta(Rm-Rf)

Ke= 5.1+1.41(11.6-5.1)

Ke= 14.265%

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