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Calculating Cost of Equity:Stock in Daenery’s Industries has a beta of 0.95. The market risk premium is 7 percent, and T-bills are currently yielding 3.6 percent. The company’s most recent dividend was $2.05 per share, and dividends are expected to grow at an annual rate of 4.1 perent indefinitely. If the stock sells for $39 per share, what is your best estimate of the company’s cost of equity?

Question

Calculating Cost of Equity:

Stock in Daenery’s Industries has a beta of 0.95. The market risk premium is 7 percent, and T-bills are currently yielding 3.6 percent. The company’s most recent dividend was $2.05 per share, and dividends are expected to grow at an annual rate of 4.1 perent indefinitely. If the stock sells for $39 per share, what is your best estimate of the company’s cost of equity?

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Step 1

Calculation of Cost of Equity using dividend growth model:

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Step 2

Calculation of Cost of Equity using CAPM:

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Step 3

Calculation of Best Estimate of Cost of Equity:

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