Answer:
The best estimate of the company's cost of equity is 10.05%.
Step-by-step explanation:
Using growth rate model formula, the cost of equity can be calculated as follows:
Cost of equity as per growth rate model = (D1 / P) + g ................ (1)
D1 = Most recent dividend * (1 + g) = $1.40 * (1 + 0.05) = $1.47
P = Current price per share = $30
g = Growth rate of dividend = 5%, or 0.05
Substituting the values into equation (1), we have:
Cost of equity as per growth rate model = ($1.47 / $30 ) + 0.05
Cost of equity as per growth rate model = 0.099. or 9.90%
Using Capital Asset Pricing Model (CAPM) formula, the cost of equity can be calculated as follows:
Cost of equity as per CAPM = Risk free rate + (Beta * Market risk premium) = 4.2 + (1.2 * 5) = 10.20%
Therefore, we have:
Best estimate of Cost of equity = (Cost of equity as per growth rate model + Cost of equity as per CAPM) / 2 = (9.90% + 10.20%) / 2 = 10.05%
Therefore, the best estimate of the company's cost of equity is 10.05%.
