ADK Industries common shares sell for $40 per share. ADK expects to set their next annual dividend at $1.75 per share. If ADK expects future dividends to grow at 7 percent per year, indefinitely, the current risk-free rate is 4 percent, the expected rate on the market is 11 percent, and the stock has a beta of 1.2, what should be the best estimate of the firm's cost of equity, by taking an average of the 2 estimates?
A) 11.89 percent
B) 11.38 percent
C) 12.40 percent
D) 12.71 percent

Question

Quizplus · Accepted Answer

The correct answer is A because the average of the two estimates is (11.89% + 11.38%) / 2 = 11.89%.

ADK Industries Common Shares Sell for $40 Per Share