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26 November, 10:22

Southern Home Cookin' just paid its annual dividend of $.65 a share. The stock has a market price of $26 and a beta of 0.8. The return on the U. S. Treasury bill is 4 percent and the market risk premium is 13 percent. What is the cost of equity?

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  1. 26 November, 10:29
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    Here the COE (cost of equity) is 14.4%

    Explanation:

    Given information -

    Beta-.8

    Treasury bill return - 4%

    Market risk premium - 13%

    Formula for taking out cost of equity -

    Return on treasury bill + Beta x Market risk premium

    = 4% +.8 x 13%

    =.04 +.8 x. 13

    =.04 +.104

    =.144

    Multiplying by 100 to make it in percentage

    =.144 x 100

    = 14.4%
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