Question: Management at Hirschman Engineering has asked you to determine the cost of equity capital based on the company's common stock. The company wants you to

Management at Hirschman Engineering has asked you to determine the cost of equity capital based on the company's common stock. The company wants you to use two methods: the dividend method and the CAPM. Last year, the first year for dividends, the stock paid $0.75 per share on the average of $11.50 on the New York Stock Exchange. Management hopes to grow the dividend rate at 3% per year. Hirschman Engineering stock has a volatility that is higher than the norm at 1.3. If safe investments are returning 5.5% and the 3% growth on common stocks is also the premium above the risk-free investments that Hirschman Engineering plans to pay, calculate the cost of equity capital using the two methods.

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