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Homework answers / question archive / Using 3 methods (dividend yield + growth rate, CAPM and bond yield + premium), calculate the cost of equity for Colgate-Palmolive corp
Using 3 methods (dividend yield + growth rate, CAPM and bond yield + premium), calculate the cost of equity for Colgate-Palmolive corp. The current dividend (Do) is $1.71 and dividends are expected to grow by 4% per year. The stock is currently selling for $85.48. The beta is 56, risk free rate is 1% and the market risk premium is 8%. Their bonds are yielding about 2.34%.
Cost of equity by dividend yield + growth rate is computed as shown below:
= [ (Current dividend x (1 + growth rate)) / current price ] + growth rate
= [ ($ 1.71 x 1.04) / $ 85.48 ] + 4%
= 6.08% Approximately
Cost of equity by CAPM is computed as follows:
= Risk free rate + Beta x Market risk premium
= 1% + 0.56 x 8%
= 5.48%
Cost of equity by bond yield plus risk premium is computed as follows:
= Yield of bonds + risk premium
= 2.34% + 8%
= 10.34%
