Question

Runtan Inc. has just paid an annual dividend of $0.45 per share. Analysts expect the firm's dividends to grow by 5% forever. Its stock price is $34.9 and its beta is 1.7. The risk-free rate is 2% and the expected return on the market portfolio is 8%.

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% + 1.7 x (0.08 - 0.02)

**= 12.2%**

**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 1.05 ] / $ 34.9 ] + 5%

**= 6.353868195%**

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

= (12.2% + 6.353868195%) / 2

**= 9.28% Approximately**

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

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