Stock in Daenerys Industries has a beta of 1.05. The market risk premium is 7 percent, and T-bills are currently yielding 3.4 percent. The company's most recent dividend was $2.35 per share, and dividends are expected to grow at an annual rate of 4.1 percent indefinitely. If the stock sells for $43 per share, what is your best estimate of the company's cost of equity?

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Business

Valentina Pierce

16 March, 02:21

Stock in Daenerys Industries has a beta of 1.05. The market risk premium is 7 percent, and T-bills are currently yielding 3.4 percent. The company's most recent dividend was $2.35 per share, and dividends are expected to grow at an annual rate of 4.1 percent indefinitely. If the stock sells for $43 per share, what is your best estimate of the company's cost of equity?

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Zane Goodwin · Answer 1

The best estimate of the company's cost of equity is 10.26%.

Explanation:

Cost of Equity by CAPM : 0.034 + 1.05 (.07) = 0.1075 or 10.75%

Cost of Equity by Dividend growth model:

RE = (2.35) (1.041) / 43) + 0.041 = 0.0978 or 9.78%

For our best estimate, we can take the average of both:

(0.0978 + 0.1075) / 2 = 0.10265 = 10.26%.