Floyd Industries stock has a beta of 1

Accounting Jan 26, 2021

Floyd Industries stock has a beta of 1.6. The company just paid a dividend of £0.7, and the dividends are expected to grow at 5 percent. The expected return on the market is 12 percent, and Treasury bills are yielding 5.5 percent. The most recent share price for Floyd is £63. Calculate the cost of equity using the SML method. a) None b) 15.9% C) 6.17% d) 7.28% 1:49 PM

Expert Solution

Correct Answer is b) 15.9%

Risk free rate of return (R_f) = 5.5%

Beta = 1.6

Market return = 12%

As per SML is Cost of Equity =Risk-free rate of return + beta (market return - risk-free rate of return).

=5.5% +1.6*(12%-5.5%)

= 15.9%

Cost of Equity = 15.9%

Thus, correct Answer is b) 15.9%

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