Epley Industries stock has a beta of 1.20. The company just paid a dividend of $
ID: 2753862 • Letter: E
Question
Epley Industries stock has a beta of 1.20. The company just paid a dividend of $.50, and the dividends are expected to grow at 6 percent. The expected return on the market is 11 percent, and Treasury bills are yielding 6.5 percent. The most recent stock price for the company is $82.
a.
Calculate the cost of equity using the DCF method.
b.
Calculate the cost of equity using the SML method.
Epley Industries stock has a beta of 1.20. The company just paid a dividend of $.50, and the dividends are expected to grow at 6 percent. The expected return on the market is 11 percent, and Treasury bills are yielding 6.5 percent. The most recent stock price for the company is $82.
a.
Calculate the cost of equity using the DCF method.
b.
Calculate the cost of equity using the SML method.
Explanation / Answer
DCF method:
Cost of equity, re = D1÷Price+Growth rate
= $0.50×(1+6%)÷$82+6%
= 6.65%
SML Method:
Cost of equity = Rf+×Rp
Rf is risk free return
Rp is risk premium
= 6.5%+1.2×(11%-6.5%)
= 11.90%
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