Stock in Daenerys Industries has a beta of 1.1. The market risk premium is 7 percent, and T-bills are currently yielding 5 percent. The company's most recent dividend was $1.40 per share, and dividends are expected to grow at an annual rate of 7 percent indefinitely.

If the stock sells for $35 per share, what is your best estimate of the company's cost of equity? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

Question

Business

Aliza Fletcher

29 January, 02:41

Stock in Daenerys Industries has a beta of 1.1. The market risk premium is 7 percent, and T-bills are currently yielding 5 percent. The company's most recent dividend was $1.40 per share, and dividends are expected to grow at an annual rate of 7 percent indefinitely.

If the stock sells for $35 per share, what is your best estimate of the company's cost of equity? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

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Answers (1)

Know the Answer?

Paulina Clark · Answer 1

The best estimate of the company's cost of equity is 11.99%.

Explanation:

CAPM based required return = 5% + 1.1*7%

= 12.7%

Dividend model required return

35 = (1.40*1.07) / (r - 0.07)

r - 0.07 = 0.0428

r = 11.28%

The best estimate of the company's cost of equity is the mean of two = (12.7% + 11.28%) / 2

= 11.99%

Therefore, The best estimate of the company's cost of equity is 11.99%.