ADK Industries common shares sell for $60 per share.ADK expects to set their next annual dividend at $3.75 per share.If ADK expects future dividends to grow at 9 percent per year,indefinitely,the current risk-free rate is 4 percent,the expected rate on the market is 11 percent,and the stock has a beta of 1.5,what should be the best estimate of the firm's cost of equity?
A) 15.25 percent
B) 14.50 percent
C) 14.88 percent
D) 15.03 percent

Question

Quizplus · Accepted Answer

Step 1: Find the cost of equity using constant-growth formula: 3.75/60 + 0.09 = 15.25 percent;
Step 2: Find the cost of equity using CAPM: 4 + 1.5(11 − 4) = 14.5 percent;
Step 3: Find the average of the two estimates: 14.88 percent

ADK Industries Common Shares Sell for $60 Per Share