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Epley Industries stock has a beta of 1.25. The company just paid a dividend of $.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 5.8 percent. The most recent stock price for the company is $75.

Calculate the cost of equity using the DCF method.

Respuesta :

Answer:

The correct answer is 0.0556 or 5.56%.

Explanation:

According to the scenario, the given data are as follows:

Current price = $75

Growth rate = 5%

Dividend paid = $0.40

Expected rate of return = 12%

So, we can calculate the cost of equity by using following method:

Cost of equity = [ Dividend (1+ growth rate ) ÷ current price] + growth rate

= [ 0.40 (1+ 0.05 ) ÷ 75] + 0.05

= [0 .42 ÷ 75 ] + .05

=  0.0556 or 5.56%

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