Using 3 methods (dividend yield + growth rate, CAPM and bond yield + premium), calculate the cost of equity for Colgate-Palmolive corp

Finance Dec 10, 2020

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%.

Expert Solution

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%

Archived Solution

Unlocked Solution

You have full access to this solution. To save a copy with all formatting and attachments, use the button below.

Already a member? Sign In

Important Note: This solution is from our archive and has been purchased by others. Submitting it as-is may trigger plagiarism detection. Use it for reference only.

For ready-to-submit work, please order a fresh solution below.

Or get 100% fresh solution

Get Custom Quote