Please show all work and make sure the answer is A,B, or C below. Thanks Riddle

Question

Please show all work and make sure the answer is A,B, or C below. Thanks

Riddle Industries has the following parameters related to its stock and firm.

Beta: 1.5
Recent Dividend 0.75 dollars
Dividend Growth Rate 4.5 percent
Expected return on market 12.5 percent
Treasury Bills Yield 4.3 percent
Most recent stock price 64.00 dollars

What is the cost of equity using DDM? What is the cost of equity using SML?

A.) 5.72 percent, 16.60 percent

B.) 5.52 percent, 12.30 percent

C.) 4.5 percent, 12.50 percent

Explanation / Answer

Expected return on stock = Risk free retun + Beta ( Market Return - Risk free return)

= 4.3 +1.5( 12.5-4.3) i.e 16.60%

Cost of equity using SML = 5.72%

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