Problem 14-23 Calculating the Cost of Equity [LO1] Berta Industries stock has a
ID: 2646690 • Letter: P
Question
Problem 14-23 Calculating the Cost of Equity [LO1]
Berta Industries stock has a beta of 1.25. The company just paid a dividend of $0.40, and the dividends are expected to grow at 5 percent. The expected return on the market is 12 percent, and Treasury bills are yielding 5.0 percent. The most recent stock price for Berta is $67.
Calculate the cost of equity using the DCF method. (Round your answer to 2 decimal places. (e.g., 32.16))
Calculate the cost of equity using the SML method. (Round your answer to 2 decimal places. (e.g., 32.16))
Berta Industries stock has a beta of 1.25. The company just paid a dividend of $0.40, and the dividends are expected to grow at 5 percent. The expected return on the market is 12 percent, and Treasury bills are yielding 5.0 percent. The most recent stock price for Berta is $67.
Explanation / Answer
1) Cost = .40*1.05 / 67 + 5% = 5.63%
2) Cost = 5% + 1.25 * (12% - 5%) = 13.75%