Question

Floyd Industries stock has a beta of 1.20. The company just paid a dividend of \$.50,...

 Floyd Industries stock has a beta of 1.20. The company just paid a dividend of \$.50, and the dividends are expected to grow at 6 percent per year. The expected return on the market is 11 percent, and Treasury bills are yielding 5.2 percent. The most recent stock price for the company is \$69.
 a. Calculate the cost of equity using the DDM method. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
 DDM method %
 b. Calculate the cost of equity using the SML method. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
 SML method %

 1) Calculation of cost of equity using DDM method: D0= \$0.50 D1= D0*(1+growth)= 0.50*(1+0.06)= \$0.53 Growth= 6% current price= \$69 Cost of equity= (D1/current price)+growth Cost of equity=(0.53/69)+0.06= 0.00768+0.06 Cost of equity= 6.77% 2) Calculation of cost of equity using SML method: Risk free rate= 5.2% Market return= 11% Beta= 1.2 Required return= Risk free rate+beta*(market return- risk free rate) Required return= 5.2+1.2*(11-5.2)= 12.16% Required return= 12.16%

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