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Berta Industries stock has a beta of 1.25. The company just paid a dividend of $0.40, and the dividends are expected to grow at 5 percent. The expected return on the market is 12 percent, and Treasury bills are yielding 5.8 percent. The most recent stock price for Berta is $75. Calculate the cost of equity using the DCF method.

Respuesta :

Answer:

0.0556 or 5.57%

Explanation:

Given that,

stock has a beta = 1.25

Dividend paid by company, D1 = $0.40

Expected growth rate of dividend, g = 5%

Expected return on the market, r = 12%

Treasury bills are yielding, t = 5.8%

Recent stock price for Berta, p = $75

Common stock (under DCF method):

[tex]=\frac{D1\times(1+g)}{p}+g[/tex]

[tex]=\frac{0.4\times(1+0.05)}{75}+0.05[/tex]

      = 0.0056 + 0.05

     = 0.0556 or 5.57%

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