Floyd Industries stock has a beta of 1.2. The company just paid
a dividend of $.50, and the dividends are expected to grow at 6
percent per year. The expected return on the market is 11 percent,
and Treasury bills are yielding 5.2 percent. The current price of
the company's stock is $69.
a. Calculate the cost of equity using the DDM
method. (Do not round intermediate calculations. Enter your
answer as a percent rounded to 2 decimal places, e.g.,
32.16.)
DDM method
%
b. Calculate the cost of equity using the SML
method. (Do not round intermediate calculations. Enter your
answer as a percent rounded to 2 decimal places, e.g.,
32.16.)
SML method
%
a. cost of equity=(D1/Current price)+Growth rate
=[(0.5*1.06)/69]+0.06
=6.77%(Approx).
b. cost of equity=risk-free rate +Beta*(market rate- risk-free rate)
=5.2+1.2*(11-5.2)
=12.16%
Floyd Industries stock has a beta of 1.2. The company just paid a dividend of $.50,...
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