Stock in Country Road Industries has a beta of 0.92. The market risk premium is

Question

Stock in Country Road Industries has a beta of 0.92. The market risk premium is 7 percent, and T-bills are currently yielding 3 percent. The company's most recent dividend was $1.7 per share, and dividends are expected to grow at a 4.5 percent annual rate indefinitely. If the stock sells for $40 per share, what is your best estimate of the company's cost of equity? (Do not round your intermediate calculations.)

6.68%

8.94%

8.01%

9.44%

9.19%

Stock in Country Road Industries has a beta of 0.92. The market risk premium is 7 percent, and T-bills are currently yielding 3 percent. The company's most recent dividend was $1.7 per share, and dividends are expected to grow at a 4.5 percent annual rate indefinitely. If the stock sells for $40 per share, what is your best estimate of the company's cost of equity? (Do not round your intermediate calculations.)

Explanation / Answer

E. 9.19%

RE = 0.03 + 0.92(0.07) = 0.0944

RE = [($1.7 × 1.045)/$40] + 0.045 = 0.0894

RE Average= (0.0944 + 0.0894)/2 = 9.19%

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