Tanner's Leather is an all-equity financed firm.The beta is 1.16,the market risk premium is 7.52 percent,the market rate of return is 10.64 percent,and the tax rate is 34 percent.The firm announced that the next dividend will be $.6864 per share and future dividends will increase by 4 percent annually.The stock sells for $13 a share.What is the average cost of equity?

Question

Quizplus · Accepted Answer

R_S = $.6864/$13 + .04 = .0928,or 9.28%R_F = .1064 - .0752 = .0312,or 3.12%R_S = .0312 + 1.16 × .0752 = .1184,or 11.84%Average R_S = (9.28% + 11.84%)/2 = 10.56%

Tanner's Leather Is an All-Equity Financed Firm