The common stock of the M&M Corporation currently sells for $60, and the dividend paid last year

Question:

The common stock of the M&M Corporation currently sells for $60, and the dividend paid last year was $2.25. Five years ago the firm paid $2.10 per share, and dividends are expected to grow at the same annual rate in the future as they did over the past five years.

a. What is the rate of growth in the firm's dividends and the corresponding cost of common equity to the firm using the constant dividend growth rate model?

b. M&M's CFO has asked his financial analyst to estimate the firm's cost of common equity using the CAPM as a way of validating the earlier calculations. The risk-free rate of interest is currently 4 percent, the market risk premium is estimated to be 5 percent, and M&M's beta is .80. What is your estimate of the firm's cost of common equity using this method?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...