Question

Runtan Inc. has just paid an annual dividend of $0.45 per
share. Analysts expect the firm's dividends to grow by 3% forever.
Its stock price is $37.9 and its beta is 1.1. The risk-free rate is
2% and the expected return on the market portfolio is 8%.

Attempt 1/1 for 10 pts.

Part 1

What is the best guess for the cost of equity?

Answer #1

**The cost of equity as per CAPM is computed as shown
below:**

**= risk free rate + beta x (return on market - risk free
rate)**

= 2% + 1.1 x (0.08 - 0.02)

**= 8.6%**

**Cost of equity as per dividend growth model will be as
follows:**

**= [ Current dividend x (1 + growth rate) / current price
] + growth rate**

= [ [ $ 0.45 x 1.03 ] / $ 37.9 ] + 3%

**= 4.222955145%**

**So, we shall take the average of above computed rates as
shown:**

= (8.6% + 4.222955145%) / 2

**= 6.41% Approximately**

Feel free to ask in case of any query relating to this question

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