The Sugar Cookie Company just paid its annual dividend of $.45 a share. The stock has a market price of $21 and a beta of.88. The return on Treasury bills is 4.2 % and the market has an 11.8 % rate of return. What is the cost of equity for the Cookie Company?

Question

Quizplus · Accepted Answer

The cost of equity can be calculated using the Capital Asset Pricing Model (CAPM), which is given by the formula: Cost of Equity = Risk-Free Rate + Beta * (Market Rate of Return - Risk-Free Rate). Plugging in the given values: Cost of Equity = 4.2% + 0.88 * (11.8% - 4.2%) = 4.2% + 0.88 * 7.6% = 4.2% + 6.688% = 10.888%. Rounding this to two decimal places gives us 10.89%.

The Sugar Cookie Company Just Paid Its Annual Dividend of $.45