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16 September, 11:23

ossdale Co. stock currently sells for $72.65 per share and has a beta of 1.21. The market risk premium is 7.20 percent and the risk-free rate is 2.94 percent annually. The company just paid a dividend of $4.25 per share, which it has pledged to increase at an annual rate of 3.55 percent indefinitely. What is your best estimate of the company's cost of equity?

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  1. 16 September, 11:47
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    10.63%

    Explanation:

    (1) Current share price = $72.65

    current dividend = $4.25

    Growth rate = 3.55%

    Cost of equity:

    = {[Current dividend (1 + Growth rate) ] : Price} + Growth rate

    = {[$4.25 (1 + 3.55%) ] : $72.65} + 3.55%

    = 9.607639%

    (2) Risk free rate = 2.94%

    Market risk premium = 7.20%

    Beta = 1.21

    Cost of equity:

    = Risk free rate + (Beta * Market risk premium)

    = 2.94% + (1.21 * 7.20%)

    = 11.65200%

    Average cost of equity = (9.607639% + 11.65200%) : 2

    = 10.62982%

    Therefore, the best estimate of the company's cost of equity is 10.63%.
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