Stock in Daenerys Industries has a beta of 1.05. The market risk premium is 7 percent, and T-bills are currently yielding 3.4 percent. The company’s most recent dividend was $2.35 per share, and dividends are expected to grow at an annual rate of 4.1 percent indefinitely. If the stock sells for $43 per share, what is your best estimate of the company’s cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

The best estimate of Cost of equity is 10.27%

Explanation:

Cost of equity as per CAPM= Risk free rate + Beta * Market risk premium

Cost of equity as per CAPM = (3.4%+ (1.05*7%)

Cost of equity as per CAPM = 0.034 + 1.05*0.07

Cost of equity as per CAPM = 0.034 + 0.0735

Cost of equity as per CAPM = 0.1075

Cost of equity as per CAPM =10.75%

Note: CAPM is capital asset pricing model

Cost of equity as per growth model = (Recent Dividend (D1) / Current price) + Growth rate

= (2.35 * 1 + 4.1%) / 43 + 41%

= (2.35 * 1.041) / 43 + 0.041

= 2.4464 / 43 + 0.041

= 0.05689 + 0.041

= 0.09789

= 9.7891%

Best estimate of Cost of equity = Average of Cost of equity as per CAPM and Cost of equity as per growth model

= (10.75+9.789186) / 2

= 20.5391 / 2

= 10.2695

= 10.27%

Hence, the best estimate of Cost of equity is 10.27%

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