Question

7. Cost of Equity: Dividend Growth Summerdahl Resort's common stock is currently trading at $39 a share. The stock is expected to pay a dividend of $2.25 a share at the end of the year (D1 = $2.25), and the dividend is expected to grow at a constant rate of 7% a year. What is the cost of common equity? Round your answer to two decimal places.

8. Cost of Equity: CAPM Booher Book Stores has a beta of 0.7. The yield on a 3-month T-bill is 5% and the yield on a 10-year T-bond is 6%. The market risk premium is 5.5%, and the return on an average stock in the market last year was 14%. What is the estimated cost of common equity using the CAPM? Round your answer to two decimal places.

Answer 1

Answer to Question 7:

Expected Dividend = $2.25
Current Price = $39.00
Growth Rate = 7.00%

Cost of Common Equity = Expected Dividend / Current Price + Growth Rate
Cost of Common Equity = $2.25 / $39.00 + 0.07
Cost of Common Equity = 0.0577 + 0.0700
Cost of Common Equity = 0.1277 or 12.77%

Answer to Question 8:

Risk-free Rate = 6.00%
Beta = 0.70
Market Risk Premium = 5.50%

Estimated Cost of Common Equity = Risk-free Rate + Beta * Market Risk Premium
Estimated Cost of Common Equity = 6.00% + 0.70 * 5.50%
Estimated Cost of Common Equity = 9.85%