Stock in CDB Industries has a beta of .99. The market risk premium is 7.4 percen

Question

Stock in CDB Industries has a beta of .99. The market risk premium is 7.4 percent, and T-bills are currently yielding 4.4 percent. CDB’s most recent dividend was $2.80 per share, and dividends are expected to grow at a 5.4 percent annual rate indefinitely.

If the stock sells for $50 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).)

If the stock sells for $50 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).)

Explanation / Answer

Common stock (under dividend growth) 11.30% 2.8*(1+5.4%)/50+0.054 Common stock (under CAPM) 11.73% 0.044+0.99*0.074 Best estimate of common stock cost 11.51%

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