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Category > Business & Finance Posted 27 May 2017 My Price 8.00

Problem 14-3 Calculating Cost of Equity [LO1]

Problem 14-3 Calculating Cost of Equity [LO1]

Stock in Dragula Industries has a beta of 1.1. The market risk premium is 6 percent, and T-bills are currently yielding 4.70 percent. The company’s most recent dividend was $1.70 per share, and dividends are expected to grow at a 5.0 percent annual rate indefinitely.

If the stock sells for $34 per share, what is your best estimate of the company’s cost of equity? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

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  • AnonymousAnonymous answered this 7 minutes laterEdit Delete279 answers• 100% Best Answer
    ke = Rf +Beta(Market risk prem)  
    Beta 1.1
    Market risk premium 6%
    Risk Free Rate 4.70%
    ke = 4.70% + 1.1(6%)  
    ke = 4.70% +6.6%  
    ke = 11.3%  
       
    Dividend just paid, D0 1.7
    Growth rate , g 5%
    Dividend at end of year D1(1.7*105%) 1.785
    Price, P0 34
    Ke = D1/P0 +g  
    Ke = 1.785/34 + 5%  
    Ke = 5.25% + 5%  
    Ke = 10.25%

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Status NEW Posted 27 May 2017 06:05 PM My Price 8.00

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