Stock in Nantec Corporation has a beta of 1.4. The market risk premium is 8%, and T-bills are currently yielding 5.5%. The company's most recent dividend was $2 per share, and dividends are expected to grow at a 5% annual rate indefinitely. If the stock sells for $42 per share, what is your best estimate of the company's cost of equity?

Question

Quizplus · Accepted Answer

The correct answer is A.The cost of equity can be calculated using the CAPM model:Cost of equity = Risk-free rate + Beta * Market risk premiumIn this case, the risk-free rate is 5.5%, the beta is 1.4, and the market risk premium is 8%. Therefore, the cost of equity is:Cost of equity = 5.5% + 1.4 * 8% = 13.35%

Stock in Nantec Corporation Has a Beta of 1