Laverne Industries stock has a beta of 1.32. The company just paid a dividend of
ID: 2750947 • Letter: L
Question
Laverne Industries stock has a beta of 1.32. The company just paid a dividend of $.82, and the dividends are expected to grow at 5.2 percent. The expected return of the market is 11.7 percent, and Treasury bills are yielding 5.2 percent. The most recent stock price is $82.75.
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 1.32. The company just paid a dividend of $.82, and the dividends are expected to grow at 5.2 percent. The expected return of the market is 11.7 percent, and Treasury bills are yielding 5.2 percent. The most recent stock price is $82.75.
A. Calculate the cost of equity using the dividend growth model method.
B. Calculate the cost of equity using the SML method.
Explanation / Answer
Part A)
The cost of equity using dividend growth model can be calculated with the use of following formula:
Cost of Equity = Dividend*(1+Growth Rate)/Current Market Price + Growth Rate
____________
Using the values provided in the question, we get,
Cost of Equity = .82*(1+5.2%)/82.75 + 5.2% = 6.24%
____________
Part B)
The cost of equity with the use of SML method can be calculated as follows;
Cost of Equity = Risk Free Rate + Beta*(Expected Market Return - Risk Free Rate)
____________
Using the values provided in the question, we get,
Cost of Equity = 5.2 + 1.32*(11.7 - 5.2) = 13.78%
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