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% per year, indefinitely, the current risk-free rate is 4%, the expected rate on the market is 11%, and the stock has a beta of 1.2, what should be the best estimate of the firm's cost of equity?

Question

Quizplus · Accepted Answer

The correct answer is A because the cost of equity is 11.89%. The cost of equity can be calculated using the Capital Asset Pricing Model (CAPM), which is:Cost of equity = Risk-free rate + Beta * (Expected market return - Risk-free rate)In this case, the risk-free rate is 4%, the beta is 1.2, the expected market return is 11%, and the cost of equity is:Cost of equity = 4% + 1.2 * (11% - 4%) = 11.89%

ADK Industries Common Shares Sell for $40 Per Share