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Stock in Daenerys Industries has a beta of 1
Stock in Daenerys Industries has a beta of 1.3. The market risk premium is 6 percent, and T-bills are currently yielding 5 percent. The company's most recent dividend was $2.00 per share, and dividends are expected to grow at an annual rate of 8 percent indefinitely If the stock sells for $36 per share, what is your best estimate of the company's cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity %
Expert Solution
Answer : Calculation of Best estimate of Cost of Equity :
Best Estimate of Cost of Equity is the average of Cost of equity as per CAPM and DDM .
Cost of Equity as per CAPM = Risk Free Rate + (Beta * Market Risk Premium)
= 5% + (1.3 * 6%)
= 12.8%
Cost of DDM = [Expected Dividend / Stock Price] + Growth rate
= [2 * (1 + 0.08) / 36 ] + 0.08
= 14%
Best Estimate of Cost of Equity = [12.8 + 14] / 2
= 13.4%
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