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17 December, 10:06

Southern Bakeries just paid its annual dividend of $.48 a share. The stock has a market price of $17.23 and a beta of. 93. The return on the U. S. Treasury bill is 3.1 percent and the market risk premium is 7.6 percent. What is the cost of equity?

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  1. 17 December, 10:30
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    10.17%

    Explanation:

    Use Capital Asset Pricing Model (CAPM) to find the cost of equity; the required rate of return by investors if they choose to buy Southern Bakeries' stock.

    CAPM; r = risk free + Beta (Market risk premium)

    risk free = 3.1% or 0.031 as a decimal

    Beta = 0.93

    Market risk premium = 7.6% or 0.076 as a decimal

    CAPM; r = 0.031 + 0.93 (0.076)

    r = 0.031 + 0.07068

    r = 0.10168

    CAPM rate of return is 10.17%

    Therefore, Southern Bakeries' cost of equity = 10.17%
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