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Homework answers / question archive / Baily Corp
Baily Corp.just paid a $2.00 dividend to its common shareholders. Analysts expect these dividends to grow indefinitely at a 60% annual rate. The market price of the stock is $42.80. What is the firm's cost of equity? Select one: a. 4.95% b. 10.95% c. 6.00% d. 6.80% Bally-Hoo common stock has a beta coefficient of 1.40. Assume the risk-free rate is 3% and the market risk premium is 6%. What is the firm's cost of equity? of Select one: a. 10.5% b. 12.6% C. 11.4% d. 13.4% e. 8.9%
| 1) | P0 | = | D1 / (Ke - g) | |
| 42.8 | = | $ 2.12 / Ke - 0.06 | ||
| Ke - 0.06 | = | 0.049533 | ||
| Ke | = | 10.95% | ||
| Workings: | ||||
| D1 | = | $ 2 (1+0.06) | ||
| = | 2.12 | |||
| 2) | Ke | = | Rf + Bi( Rm - Rf) | |
| where, Market risk premium is (Rm - Rf) | ||||
| Therefore, | ||||
| Ke | = | 3% + 1.4(6%) | ||
| = | 11.40% | |||
