Question

Q1/wxMaxima Industries just paid an annual dividend of $1.85 a share. The market price of the stock is $22.26 and the firm promises a constant growth rate in dividends of 4.8 percent. What is the firm's cost of equity? (Enter rate in percents, not in decimals)

Q2/Fifteen, Inc.'s common stock has a beta of 0.9. The risk-free rate is 5.4 percent and the expected return on the market is 8.7 percent. What is the company’s cost of equity capital?

Q3/Jensen's Travel Agency has a 4.1 percent preferred stock outstanding that is currently selling for $58.66 a share. The rate of return on the market portfolio is 8.68 percent and the firm's tax rate is 36 percent. What is Jensen's cost of preferred stock? Remember that the usual par value of preferred stock is $100. Enter the answer in percents.

Answer 1

Q1. Cost of Equity = (Expected Dividend / Price ) + Growth Rate

= [ ( $ 1.85 * 1.048) / $ 22.26] + 4.8%

= 13.51%

Hence the correct answer is 13.51%

Q2.

cost of equity capital= Risk Free rate + (Market Return - Risk Free Rate ) * Beta

= 5.4% + ( 8.7% - 5.4% ) * 0.9

= 8.37%

Hence the correct answer is  8.37%

Q3.

Annual Dividend = 4.1% * $ 100

= $ 4.10

Price = $ 58.66

Hence, Cost of  preferred stock = Annual Dividend / Price *100

= $ 4.10 / $ 58.66 *100

= 6.99%

Hence the correct answer is 6.99%