Question

JJ firm issues preferred dividends at an annual rate of $3.3. Its current preferred stock price is $23.69. Assume that the equity beta for JJ is 0.75. The Yield on 10-year treasuries is 3.89%, and that the market risk premium for the year is 7%. The company's EPS expected growth is 2%. For this year, the dividends for JJ firm are the same for common and preferred stock; additionally the price for common stock is $33. What is the common cost of equity for JJ Firm using the CDGM method?

Answer 1

As the dividends for JJ firm are the same for common and preferred stock for this year.

Annual dividend of equity (D0) = $3.3

Growth rate of EPS(g) = 2% (Note- Assuming growth rate of EPS and Dividends are same constantly)

Current price of Stock(P0) = $33

Calculating the cost of equity using Constant Dividend Growth Model(CDGM):-

Ke = 12.20%

So, the common cost of equity for JJ Firm using the CDGM method is 12.20%

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