Question

Stock in Duck Industries has a beta of 1.06. The market risk premium is 8.5 percent, and T-bills are currently yielding 5 percent. The company's most recent dividend was $1.8 per share, and dividends are expected to grow at a 6.5 percent annual rate indefinitely. If the stock sells for $38 per share, what is your best estimate of the company's cost of equity?

Answer 1

Answer:

14%

Explanation:

Capital asset pricing model measure the cost of equity oof a company. it is used to make decision for addition of specific investment in a well diversified portfolio.

Formula for CAPM

Expected return = Risk free rate + beta ( market risk premium )

As per given data

Beta = 1.06

Market risk Premium = 8.5%

Risk free rate = 5%

Cost of equity = 5% + 1.06 ( 8.5% )

Cost of equity = 5% + 9.01%

Cost of equity = 14.01%