You are estimating the cost of equity for the company’s common stock using both CAPM and the constant dividend growth model. Calculate the average of the two estimates based on the following information: Your company just paid a $1.20 cash dividend for the year. There has been a steady growth in dividends of 5% per year which analysts expect to continue. The current stock price is $22. You estimate the beta for the company stock at 1.10. The current risk-free rate is 4.5% and the market risk premium is 6.2%.

Calculate the following returns: (1/100 of one percent without % sign, e.g. 12.671, if a negative percentage, -9.56):

1) Cost of capital – constant dividend growth model: Answer

2) Cost of capital – CAPM: Answer

3) Estimated cost of equity: Answer

Answer rating: 100% (QA)

D 1 1 20 x 1 05 1 26 Cost of equity D 1 P 0 g 1 26 22 0 05 0 ... View the full answer