Pierce Industries stock has a beta of 1.30. The company just paid a dividend of
ID: 2812732 • Letter: P
Question
Pierce Industries stock has a beta of 1.30. The company just paid a dividend of $.80, and the dividends are expected to grow at 5 percent. The expected return on the market is 11.5 percent, and Treasury bills are yielding 5 percent. The most recent stock price is $82.25.
a. Calculate the cost of equity using the dividend growth model method. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
b. Calculate the cost of equity using the SML method. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity
Explanation / Answer
1. Cost of equity=Last dividend*(1+growth rate)/Price+growth rate=0.80*(1+5%)/82.25+5%=6.021
2. Cost of equity=risk free rate+beta*(market return-risk free)=5%+1.3*(11.5%-5%)=13.45%