Berta Industries stock has a beta of 125 The company just paid a dividend of $0.

Question

Berta Industries stock has a beta of 125 The company just paid a dividend of $0.40, and the dividends are expected to grow at 5 percent. The expected return on the market is 12 percent, and Treasury bills are yielding 6.4 percent. The most recent stock price for Berta is $81 a. Calculate the cost of equity using the DCF method. (Round your answer to 2 decimal pla (e.g, ces 32.16) DCF method b. Calculate the cost of equity using the SML method. (Round your answer to 2 decimal places.(e.g.. 32.16)) SML method

Explanation / Answer

a.Cost of equity=(Dividend for next period/Current price)+Growth rate

=(0.4*1.05)/81+0.05

=5.52%

b.Cost of equity=Risk free rate+Beta*(MArket rate-Risk free rate)

=6.4+1.25*(12-6.4)

=13.4%

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