Stock in CDB Industries has a beta of 1.10. The market risk premium is 7 percent

Question

Stock in CDB Industries has a beta of 1.10. The market risk premium is 7 percent, and T-bills are current yielding 4.0 percent. CDB's most recent dividend was dollar 3.40 per share, and dividends are expected to grow at a 5 percent annual rate indefinitely. Required: If the stock sells for dollar 55 per share, 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 percentage

Explanation / Answer

56 = (3.40*1.05)/ke - .05

=> ke = 11.375%

Thus, the best estimate for cost of equity (Using DDM) is 11.38%

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