Question

Big Dawg Incorporated is trying to estimate its cost of equity capital. The firm believes its beta is 0.94. The current risk free rate in the economy is 1.58%, while the market portfolio risk premium is 5.00%. What is an estimate for the equity cost of capital? Submit Answer format: Percentage Round to: 2 decimal places (Example: 9.24%, % sign required. Will accept decimal format rounded to 4 decimal places (ex: 0.0924))

A company has issued 100,953.00 shares of preferred stock. The preferred shares have par value of $100.00 and pay a 4.82% dividend per year. The shares are currently trading at $76.91 on the secondary market.

What is the required return that investors seek based on the current price?

Answer 1

The equity cost of capital =  risk free rate + (market portfolio risk premium * beta)

= 1.58% + (5%*0.94)

= 6.28%

The  required return = Annual Dividend / Current Price *100

= ( $100*4.82%) / $ 76.91*100

= 6.27%