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The tax rate is 40% and common stock dividends grow at 6%
The tax rate is 40% and common stock dividends grow at 6%. The last common stock dividend paid was £3.80 and the market price of a share is £70. Treasury bonds yield 6% and the market risk premium is 5% with a beta of 1.3. The preferred stock has a value of E90 per share and a dividend of £10 per share. The cost of debt is 8%.
Afhat is the cost of common stock equity using the Capital Asset Pricing Model?
Select one: O a. 12.5% O b. 11.75% O c. 4.8% O d. None of these answers are correct O e. 11.11%
Expert Solution
Computation of Cost of Common Stock Equity using Capital Assets Pricing Model (CAPM):
Cost of Common Stock Equity = Risk-free Rate + Beta*Market Risk Premium
= 6% + 1.3*5%
= 6% + 6.50%
Cost of Common Stock Equity = 12.50%
So, the correct option is A "12.50%".
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