The common stock for the Hetterbrand Corporation sells for $60.73; and the last

Question

The common stock for the Hetterbrand Corporation sells for $60.73; and the last dividend paid was $2.31. Five years ago the firm paid $1.93 per share: and dividends are expected to grow at the same annual rate in the future as they did over the past five years. What is the estimated cost of common equity to the firm using the dividend growth model? Hetterbrand's CFO has asked his financial analyst to estimate the firm's cost of common equity using the CAPM as a way of validating the earlier calculations. The risk-free rate of interest is currently 4.8 percent the market risk premium is estimated to be 5.7 percent and Hetterbrand's beta is 0.85. What is your estimate of the firm's cost of common equity using this method?

Explanation / Answer

Ans

Ans 1 Current Dividend Paid 2.31 Dividend paid 5 Years ago 1.93 Growth in divdend for 5 years 19.7% Annualised growth rate 3.67% Cost of Equity=(D1/P)+g Where D1 =Dividend at year 1 P=Current Market price g=Growth rate ((2.31*103.67%)/60.73)+3.67% 7.61% Ans 2 Cost of equity using CAPM Rf+(Rm-Rf)*Beta 4.8+(5.7*.85) 9.65%

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