Minder Industries stock has a beta of 1.30. The company just paid a dividend of $.30, and the dividends are expected to grow at 4 percent. The expected return on the market is 13 percent, and Treasury bills are yielding 6 percent. The most recent stock price for the company is $77. a. Calculate the cost of equity using the DCF method. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.) b. Calculate the cost of equity using the SML method. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

Question

Chaim

Business

13 February, 22:02

Minder Industries stock has a beta of 1.30. The company just paid a dividend of $.30, and the dividends are expected to grow at 4 percent. The expected return on the market is 13 percent, and Treasury bills are yielding 6 percent. The most recent stock price for the company is $77. a. Calculate the cost of equity using the DCF method. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.) b. Calculate the cost of equity using the SML method. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

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Answers (1)

Know the Answer?

Dalton Ferguson · Answer 1

(a) 0.04 or 4%

(b) 0.151 or 15.1%

Explanation:

(a) Cost of equity under DDM:

Re = (D1 + P) + g

where,

D1 = Dividend next year

P = Price of share

g = Growth rate

Re = [ (0.30 + 1.04) : $77] + 0.04

= 0.04

(b) cost of equity using the SML method:

Re = Rf + β (Rm - Rf)

= 6% + 1.30 (13% - 6%)

= 0.06 + 1.30 (0.07)

= 0.151 or 15.1%