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National Home Rentals has a beta of 1
National Home Rentals has a beta of 1.3, a stock price of $19, and recently paid an annual dividend of $0.94 a share. The dividend growth rate is 4.5%. The market has a 10.6% rate of return and a risk premium of 7.5%. What is the firm's cost of equity?
Expert Solution
Computation of the firm's cost of equity using dividend growth model:-
Cost of equity = (D1 / Current stock price) + Growth rate
= ($0.94*(1+4.5%) / $19) + 4.5%
= ($0.98 / $19) + 4.5%
= 5.17% + 4.5%
= 9.67%
Computation of the firm's cost of equity using CAPM:-
Risk free rate = Market return - Market risk premium
= 10.6% - 7.5%
= 3.1%
Cost of equity = Risk free rate + (Beta * Market risk premium)
= 3.1% + (1.3 * 7.5%)
= 3.1% + 9.75%
= 12.85%
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