Answer:
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.
