Runtan Inc. has just paid an annual dividend of $0.45 per share. Analysts expect the firm's...
Runtan Inc. has just paid an annual dividend of $0.45 per share. Analysts expect the firm's dividends to grow by 5% forever. Its stock price is $37.4 and its beta is 1.3. The risk-free rate is 2% and the expected return on the market portfolio is 8%.
Part 1
What is the best guess for the cost of equity?
Homework Answers
Ke = [ D1 / P0 ] + g
D1 = D0 (1+g)
= 0.45 ( 1 + 0.05 )
= 0.45 ( 1.05 )
= $ 0.4725
D1 = Expected Div after 1 Year
P0 = Current price
g = Growth Rate
Ke = [ D1 / P0 ] + g
= [ 0.4725 / 37.4 ] + 0.05
= 0.0126 + 0.05
= 0.0626 i.e 6.26%
Best guess of cost of Equity is 6.26%
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