Question

1- In the previous 5 years, Google paid an annual dividend as follows:

Year	Dividends
2011	2.7
2010	2.5
2009	2.2
2008	1.8
2007	1.5

1. Google is expected to pay a dividends of $3 in the next year (2012). What is the cost of equity of Google if its current stock price is $90? Calculate using excel (formulas viewable).

2. 2- As a technology-based firm, Google has a high beta of 1.4. if the risk-free rate of return is 5% and the market risk premium is 3%, calculate the cost of equity of Google using the capital asset pricing model (CAPM)? Calculate using excel (formulas viewable).

Answer 1

1. Using excel formula to calculate

Dividend Year 2011	2.7
Dividend Year 2012	3
Growth	11.11%	Excel formula=(3-2.7)/2.7
Current Stock Price	90
Cost of Equity	14.44%	(Excel formula=(3/90)+11.11%

2.

Risk free rate	5%
Beta	1.4
Market Risk Premium	3%
Cost of Equity	9.200%	(Excel formula=5%+1.4*3%