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 because the cost of equity is calculated as the risk-free rate plus the beta of the stock multiplied by the market risk premium. In this case, the risk-free rate is 5.5%, the beta of the stock is 1.4, and the market risk premium is 8%. Therefore, the cost of equity is 5.5% + 1.4 * 8% = 13.35%.

Stock in Nantec Corporation Has a Beta of 1