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rayray9471
16.11.2020 •
Business
Floyd Industries stock has a beta of 1.20. The company just paid a dividend of $.50, and the dividends are expected to grow at 6 percent per year. The expected return on the market is 11 percent, and Treasury bills are yielding 5.9 percent. The most recent stock price for the company is $76.
Required:
a. Calculate the cost of equity using the DDM method.
b. Calculate the cost of equity using the SML method.
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Ответ:
a.
r = 0.06697 or 6.697% rounded off to 6.70%
b.
r = 0.1202 or 12.02%
Explanation:
a.
Using the constant growth model of dividend discount model, we can calculate the price of the stock today. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula for price today under this model is,
P0 = D0 * (1+g) / (r - g)
Where,
D0 * (1+g) is dividend expected for the next period /year g is the growth rate r is the required rate of return or cost of equityPlugging in the values for P0, D0 and g in the formula, we can calculate the value of r to be,
76 = 0.5 * (1+0.06) / (r - 0.06)
76 * (r - 0.06) = 0.53
76r - 4.56 = 0.53
76r = 0.53 + 4.56
r = 5.09 / 76
r = 0.06697 or 6.697% rounded off to 6.70%
.
Using the CAPM, we can calculate the required/expected rate of return on a stock. This is the minimum return required by the investors to invest in a stock based on its systematic risk, the market's risk premium and the risk free rate.
The formula for required rate of return under CAPM is,
r = rRF + Beta * (rM - rRF)
Where,
rRF is the risk free rate
rM is the market return
r = 0.059 + 1.2 * (0.11 - 0.059)
r = 0.1202 or 12.02%
Ответ:
I need one to go up a rank.
Explanation:
It's kinda important to me