Appalachian Mountain Goods has paid increasing dividends of $.0.12,$0.18,$0.20,and $0.25 a share over the past four years,respectively.The firm estimates that future increases in its dividends will be equal to the arithmetic average growth rate over these past four years.The stock is currently selling for $12.60 a share.The risk-free rate is 3.2 percent and the market risk premium is 9.1 percent.What is the cost of equity for this firm if its beta is 1.26?

Question

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($0.18 - $0.12)/$0.12 = 0.50($0.20 - $0.18)/$0.18 = 0.111111($0.25 - $0.20)/$0.20 = 0.25g = (0.50 + 0.111111 + 0.25)/3 = 0.287037R_E = 0.032 + 1.26(0.091) = 0.14666 Average R_E = (0.14666 + 0.312573)/2 = 22.96 percent

Appalachian Mountain Goods Has Paid Increasing Dividends of