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28 May, 21:44

2. Boilermaker Corp has a beta of 0.8. The market return is expected to be 15%, and the current risk-free rate is 4%. We have used analysts' estimates to determine that the market believes our dividends will grow at 5% per year and our last dividend was $1. The stock is currently selling for $12.00. What is the company's cost of equity using the Security Market Line and using the Dividend Growth Model?

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  1. 29 May, 01:35
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    Security Market Line 16%

    Dividend Growth Model 13.75%

    Explanation:

    Boilermaker Corp

    Security Market Line: Re = 4% + 0.8 (15%)

    =0.04+0.12

    = 16%

    Dividend Growth Model : Re = [1 (1.05) / 12.00] + 0.05

    =1 (0.0875) + 0.05

    =0.0875+0.05

    = 13.75%

    Therefore the company's cost of equity using the Security Market Line is 16% and using the Dividend Growth Model is 13.75%
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