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Bezzdna [24]
3 years ago
10

Excelor stock is expected to pay $3.00 per share as its next annual dividend. The firm has a policy of increasing the dividend b

y 11.0 percent annually. The stock has a market price of $13.65 and a beta of 2.8. The market risk premium is 8.56 percent and the risk-free rate is 4.90 percent. What is the cost of equity?
Business
1 answer:
andrew-mc [135]3 years ago
3 0

Answer:

30.92%

Explanation:

You find the answer by calculating the cost of equity using two methods; Dividend discount model and CAPM

<u>Dividend discount model;</u>

cost of equity; r = (D1/P0) +g

whereby, D1 = next year's dividend = 3.00

P0= current price = 13.65

g = dividend growth rate = 11% or 0.11 as a decimal

r = (3/13.65) + 0.11

r = 0.2198 + 0.11

r= 0.3298 or 32.98%

<u>Using CAPM;</u>

r = risk free + beta (Market risk premium)

r = 0.049 + (2.8 * 0.0856)

r = 0.049 + 0.2397

r = 0.2887 or 28.87%

Next, find the average of the two cost of equities;

=(32.98% + 28.87% )/2

= 30.92%

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