The market rate of return is 14.8 percent and the risk-free rate is 4.45 percent. Galaxy Co. has 54 percent more systematic risk than the overall market and has a dividend growth rate of 5.5 percent. The firm's stock is currently selling for $39 a share and has a dividend yield of 3.6 percent. What is the firm's cost of equity?

Question

Quizplus · Accepted Answer

The correct answer is A.The firm's cost of equity can be calculated using the CAPM model:Cost of equity = Risk-free rate + Beta * (Market rate of return - Risk-free rate) + Dividend growth rateBeta = 1 + 54% = 1.54Cost of equity = 4.45% + 1.54 * (14.8% - 4.45%) + 5.5%= 4.45% + 1.54 * 10.35% + 5.5%= 4.45% + 15.93% + 5.5%= 25.88%

The Market Rate of Return Is 14