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Musical Charts just paid an annual dividend of $3
Musical Charts just paid an annual dividend of $3.05 per share. This dividend is expected to increase by 2.9 percent annually. Currently, the firm has a beta of 1.29 and a stock price of $32 a share. The risk-free rate is 3.8 percent and the market rate of return is 13.4 percent.
Calculate the cost of equity using the Dividend Growth Method.
RE= %
Calculate the cost of equity using the Security Market Line approach.
RE= %
What is the cost of equity capital for this firm?
RE = %
Expert Solution
| Price = recent dividend* (1 + growth rate )/(cost of equity - growth rate) |
| 32 = 3.05 * (1+0.029) / (Cost of equity - 0.029) |
| Cost of equity% = 12.71 |
| As per CAPM |
| expected return = risk-free rate + beta * (expected return on the market - risk-free rate) |
| Expected return% = 3.8 + 1.29 * (13.4 - 3.8) |
| Expected return% = 16.18 |
Cost of equity for firm = (12.71+16.18)/2 =14.45%
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