Why Choose Us?
0% AI Guarantee
Human-written only.
24/7 Support
Anytime, anywhere.
Plagiarism Free
100% Original.
Expert Tutors
Masters & PhDs.
100% Confidential
Your privacy matters.
On-Time Delivery
Never miss a deadline.
Floyd Industries stock has a beta of 1
Floyd Industries stock has a beta of 1.50. The company just paid a dividend of $ 80, and the dividends are expected to grow at 5 percent per year. The expected return on the market is 12 percent, and Treasury bills are yielding 5.5 percent. The most recent stock price for Floyd is $61.
a. Calculate the cost of equity using the DDM method. b. Calculate the cost of equity using the SML method. c. Why do you think your estimates in (a) and (b) are so different?
Expert Solution
a). Computation of the cost of equity using DDM method:-
Cost of equity = (D1 / Current stock price) + Growth rate
= ($0.80 * (1+5%) / $61) + 5%
= ($0.84 / $61) + 5%
= 1.38% + 5%
= 6.38%
b). Computation of the cost of equity using the SML method:-
Cost of equity = Risk free rate + Beta * (Expected market return - Risk free rate)
= 5.5% + 1.50 * (12% - 5.5%)
= 5.5% + (1.50 * 6.5%)
= 5.5% + 9.75%
= 15.25%
c). DDM and SML method both are used for estimating the cost of equity. The estimation is different because each method for estimating the cost of equity depends upon different assumptions.
Archived Solution
You have full access to this solution. To save a copy with all formatting and attachments, use the button below.
For ready-to-submit work, please order a fresh solution below.
