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Example 7

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Example 7.1 Stock Prices and Returns (1 of 4) why we are using equity cost of capital instead of rik free interest rate BECAUSE STOCKS ARE RISKY INVESTMENTS AND WE CANNOT USE RISK FREE Problem INTEREST RATE TO VALUE THEM equity cost of captal: the expected return of omer investment valable in the market with equivalent risk to Suppose you expect Longs Drug Stores to pay an the firms shares annual dividend of $0.56 per share in the coming year and to trade for $45.50 per share at the end of the year. If investments with equivalent risk to Longs' stock have an expected return of 6.80%, what is the most you would pay today for Longs' stock? What dividend yield and capital gain rate would you expect at this price? (