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21 January, 12:30

urrently sells for $69.57 per share and has a beta of. 91. The market risk premium is 7.40 percent and the risk-free rate is 2.97 percent annually. The company just paid a dividend of $3.69 per share, which it has pledged to increase at an annual rate of 3.40 percent indefinitely. What is your best estimate of the company's cost of equity?

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  1. 21 January, 16:25
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    Using Capital Asset Pricing Model

    Ke = Rf + β (Market risk-premium)

    Ke = 2.97 + 0.91 (7.40)

    Ke = 9.9%

    Using Dividend Growth Model

    Ke = Do (1 + g) + g

    Po

    Ke = $3.69 (1 + 0.034) + 0.034

    $69.57

    Ke = $3.69 (1.034) + 0.034

    $69.57

    Ke = 0.0548 + 0.034

    Ke = 0.089 = 9%

    The best estimate of the company's cost of equity is 9.9%

    Explanation:

    Cost of equity is a function of risk-free rate plus the product of beta and market risk-premium according to capital asset pricing model.

    Using dividend growth model, cost of equity is a function of current dividend paid, subject to growth rate, divided by current market price plus growth rate.
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