Calculating cost of equity Company's common stock has a ...



Calculating cost of equity Company's common stock has a beta of 1.05. If the risk-free rate is 5.3% and the expected return on teh market is 12%, what is the company's cost of capital?

Cost of Equity = Risk free Rate + Beta (Required return on market – Risk free return)

Cost of Equity = .053 + 1.05(.12-.053) = .12335 or 12.335%

Stock in Country Road Industries has a beta of .85. The market risk premium is 8% and T-bills are currently yielding 5%.

Cost of Equity = Risk free Rate + Beta (Required return on market – Risk free return)

Cost of Equity = Risk free Rate + Beta (Market Risk Premium)

Cost of Equity = .05+.85(.08) = .118 or 11.8%

The company's most recent dividend was $1.60 per share, and dividends are expected to grow at 6% annual rate indefinitely. If the stock sells for $37 per share, what is the best estimate for cost of equity?

Current Stock Price = Dividend at end of year 1/(Required Return-Growth Rate)

37 = (1.6*1.06)/(R-.06)

R= .1058 or 10.58%

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