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Brisbane Rental Corp has a beta of 0
Brisbane Rental Corp has a beta of 0.90 and the market risk premium is 7%. The risk-free rate is 8%. Its last dividend was $1.80 per share and it is expected to grow at 7% indefinitely. The current market price is $25. What is Brisbane Rental's cost of equity capital?
Expert Solution
Computation of Brisbane Rental's Cost of Equity Capital using CAPM:
Cost of Equity Capital = Risk-free Rate + Beta * Market Risk Premium
= 8% + 0.90 * 7%
= 8% + 6.30%
Cost of Equity Capital = 14.30%
Computation of Brisbane Rental's Cost of Equity Capital using Dividend Growth Model:
Cost of Equity Capital = Last Year Dividend*(1+Growth Rate)/Current Market Price + Growth Rate
= $1.80*(1+7%)/$25 + 7%
= $1.926/$25 + 7%
Cost of Equity Capital = 14.70%
Average Cost of Equity Capital = (Cost of Equity Capital using CAPM + Cost of Equity Capital using Dividend Growth Model)/2
= (14.30%+14.70%)/2
Average Cost of Equity Capital = 14.50%
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