Urrently sells for $69.57 per share and has a beta of .91. the market risk premium is 7.40 percent and the risk-free rate is 2.97 percent annually. the company just paid a dividend of $3.69 per share, which it has pledged to increase at an annual rate of 3.40 percent indefinitely. what is your best estimate of the company's cost of equity?

Using Capital Asset Pricing Model

Ke= Rf +β(Market risk-premium)

Ke = 2.97 + 0.91(7.40)

Ke = 9.9%

Using Dividend Growth Model

Ke = Do(1 + g) + g

               Po

Ke = $3.69(1 + 0.034)  + 0.034

                    $69.57

Ke = $3.69(1.034) + 0.034

                  $69.57

Ke = 0.0548  + 0.034

Ke = 0.089 = 9%

The best estimate of the company's cost of equity is 9.9%

Explanation:

Cost of equity is a function of risk-free rate plus the product of beta and market risk-premium according to capital asset pricing model.

Using dividend growth model, cost of equity is a function of current dividend paid, subject to growth rate, divided by current market price plus growth rate.

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