A firm with a beta of 1.22 just paid its annual dividend of $5.64 a share. The dividends increase at a rate of 2% annually. The risk-free rate is 3.5%, the market rate of return is 12.4%, and the dividend discount rate is 11.6%. What is the best estimate of the firm's cost of equity if the firm's stock currently sells for $60 a share using an average of methods?

Question

Quizplus · Accepted Answer

r_e = 0.035 + 1.22(0.124 - 0.035) = 0.14358, or 14.358%r_e = ($5.64 × 1.02)/$60 + 0.02 = 0.11588, or 11.588%Average = (14.358% + 11.588)/2 = 12.97%

A Firm with a Beta of 1