Phillip Enterprises Inc. needs to determine its cost of equity capital. Use the following information to estimate the firm's cost of equity using both the security market line and the dividend growth model.
The current market price of stock is $22.89, the risk-free rate is 4.00%, the required return on the market portfolio is 13.50%, the firm has a constant growth rate in dividends of 3.00% per year, current dividends are $2.00, and the firm's beta is 0.90.
Dividend Growth Model and CAPM
Dividend Growth model states the cost of the equity on the basis of the dividends of the company whereas the CAPM of the Capital Asset Pricing Model states the cost of equity on the basis of the risk factors of the business
Answer and Explanation:
As per Dividend Growth Model,
Cost of equity = D1 / P0 + g
D1 is the expected dividend = D0 x (1+g) = 2 x 1.03 = $ 2.06
P0 is the current...
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fromChapter 3 / Lesson 18
How does a business figure out the true cost and best means of obtaining capital? In this lesson, we will explore the cost of capital, flotation cost, net present value, and internal equity to help answer that question.