Stock in daenerys industries has a beta of 1.4. the market risk premium is 7 percent, and t-bills are currently yielding 4.4 percent. the company’s most recent dividend was $1.60 per share, and dividends are expected to grow at an annual rate of 6 percent indefinitely.

if the stock sells for $32 per share, what is your best estimate of the company’s cost of equity?

The cost of capital for the firm is 12.75%

Explanation:

from the CAMP model we can determinatethe rate as follow:

risk free0.044

premium market = (market rate - risk free) = 0.07

beta(non diversifiable risk) = 1.4

Ke0.14200 = 14.2%

from the dividend grow model:

D0 = 1.60

D1D0 x (1+g) 1.60 dollars x 1.06 = 1.696

P$ 32

g0.06

Ke0.113 = 11.3%

we can do an average betwene the two methods:

(14.2 + 11.3)/2 = 12.75

answer; ///hong kong;

answernaturalistic observation;