Tanner's Leather is an all-equity financed firm with a beta of 1.07.The market risk premium is 7.08 percent,the market rate of return is 9.84 percent,and the tax rate is 34 percent.The company announced that the next annual dividend will be $0.72 per share and future dividends will increase by 2.8 percent annually.The stock sells for $11 a share.What is the average cost of equity?

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Quizplus · Accepted Answer

R_S = $0.72 / $11 + 0.028 = 0.0935,or 9.35% R_RF = 9.84% - 7.08% = 2.76% R_S = 2.76% + 1.07(7.08%)= 10.34% Average R_S = (9.35% + 10.34%)/ 2 = 9.84%

Tanner's Leather Is an All-Equity Financed Firm with a Beta