value: 0 points Stock in Dragula Industries has a beta of 1.1. The market risk p

Question

value: 0 points Stock in Dragula Industries has a beta of 1.1. The market risk premium is 7 percent, and T-bills are currently yielding 4.80 percent. The company's most recent dividend was $1.80 per share, and dividends are expected to grow at a 6.0 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 intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Cost of equity

Explanation / Answer

Cost of equity using dividend growth model=(Dividend for next period/Current price)+Growth rate

=(1.8*1.06)/40+0.06=10.77%

Cost of equity using CAPM=Risk free rate+Beta*MArket risk premium

=4.8+(1.1*7)=12.5%

Hence cost of equity=(10.77+12.5)/2=11.64%(Approx).

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