The stock of Canadian Ski Wear is currently trading at $45 a share and the equity beta of the company is estimated to be 1.3. The company is expected to pay a dividend of $1.50 a share next year, and this dividend is expected to grow at a rate of 4% per year. The rate on the 10-year U. S. Treasury bond is 4% and you estimate the market risk premium to be 5%. Using the CAPM, what is the company's cost of equity?

Question

Business

Xander Gates

2 November, 20:53

The stock of Canadian Ski Wear is currently trading at $45 a share and the equity beta of the company is estimated to be 1.3. The company is expected to pay a dividend of $1.50 a share next year, and this dividend is expected to grow at a rate of 4% per year. The rate on the 10-year U. S. Treasury bond is 4% and you estimate the market risk premium to be 5%. Using the CAPM, what is the company's cost of equity?

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Answers (1)

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Krystal Meza · Answer 1

10.5%

Explanation:

In this question, we use the Capital Asset Pricing Model (CAPM). The formula is shown below:

Expected rate of return = Risk-free rate of return + Beta * market risk premium

= 4% + 1.3 * 5%

= 4% + 6.5%

= 10.5%

The market risk premium = Market rate of return - risk free rate of return.

The dividend and per share is not relevant for the computation part. Hence, ignored it