Question

Donut delites has a beta of 1.06, a dividend growth rate of 3.2 percent, a stock price of $12 a share, and an expected annual dividend of $.84 per share next year. the market rate of return is 11.4 percent and the risk-free rate is 3.8 percent. what is the firm's cost of equity?

Answer 1

RE = .038 + 1.06(.114-.038) = .11856 ; RE = ($.68/$12) + .012 = .06867 ; Average RE = (.11856 + .06867)/2 = .0936, or 9.36 percent