E(r) = RFR + ?(Rmkt - RFR), where Rmkt - RFR is the market risk premium...
E(r) = 4.2 + 0.92(7.2) = 10.824%
Using Gordon Growth model...
P0 = D1 / (r - g)
D1 = D0(1 + g)
D1 = 2.10(1.052) = 2.2092
$43 = 2.2092 / (r - 0.052)
0.05138 = r - 0.052
r = 0.10338, or 10.338%
Stock in ABC Industries has a beta of .92. The market risk premium is 7.2 percent, and T-bills are currently yielding 4.2 percent. CDB’s most recent dividend was $2.10 per share, and dividends are expected to grow at a 5.2 percent annual rate indefinitely.
Required:
If the stock sells for $43 per share, what is your best estimate of ABC cost of equity?
