Question

Stock in CDB Industries has a beta of 1.10. The market risk premium is 7.2 percent, and T- bills are currently yielding 4.1 percent. The most recent dividend was $2.56 per share, and dividends are expected to grow at an annual rate of 5 percent indefinitely. If the stock sells for $45 per share, what is your best estimate of the company's cost of equity? (Do not round intermediate calculations and enter your answer percent rounded to 2 decimal places, e.g., as a 32.16.) Cost of equity %

Answer 1

As per CAPM

expected return = risk-free rate + beta * (Market risk premium)

Expected return% = 4.1 + 1.1 * (7.2)

Expected return% = 12.02

Price = recent dividend* (1 + growth rate )/(cost of equity - growth rate)

45 = 2.56 * (1+0.05) / (Cost of equity - 0.05)

Cost of equity% = 10.97

cost of equity = (12.02+10.97)/2

=

11.5

Please ask remaining parts seperately, questions are unrelated