Stock in Daenerys Industries has a beta of 1.3. The market risk premium is 6 per

Question

Stock in Daenerys Industries has a beta of 1.3. The market risk premium is 6 percent, and T-bills are currently yielding 5 percent. The company’s most recent dividend was $2.00 per share, and dividends are expected to grow at an annual rate of 8 percent indefinitely.

If the stock sells for $36 per share, what is your best estimate of the company’s cost of equity? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Stock in Daenerys Industries has a beta of 1.3. The market risk premium is 6 percent, and T-bills are currently yielding 5 percent. The company’s most recent dividend was $2.00 per share, and dividends are expected to grow at an annual rate of 8 percent indefinitely.

Explanation / Answer

Best estimate of cost of equity = D0(1+g)/current price + g

                                               = 2(1+.08) / 36   + .08

                                              = 2*1.08 /36 + .08

                                            = .06 + .08

                                            = 14%

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.