Laverne Industries stock has a beta of 1.40. The company just paid a dividend of
ID: 2712088 • Letter: L
Question
Laverne Industries stock has a beta of 1.40. The company just paid a dividend of $.90, and the dividends are expected to grow at 5 percent. The expected return of the market is 11.5 percent, and Treasury bills are yielding 5 percent. The most recent stock price is $84.75.
A. Calculate the cost of equity using the dividend growth model method
B. Calculate the cost of equity using the SML method.
Laverne Industries stock has a beta of 1.40. The company just paid a dividend of $.90, and the dividends are expected to grow at 5 percent. The expected return of the market is 11.5 percent, and Treasury bills are yielding 5 percent. The most recent stock price is $84.75.
A. Calculate the cost of equity using the dividend growth model method
B. Calculate the cost of equity using the SML method.
Explanation / Answer
Stock price = D1÷(r-g)
D1 is next expected dividend
r is required return
g is growth rate
$84.75 = $0.90×(1+5%)÷(r-5%)
Cost of equity, r = 6.12%
Expected return = Rf+×Rp
Rf is risk free return
Rp is risk premium
= 5%+1.4×(11.5%-5%)
= 14.1%
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