JJ firm issues preferred dividends at an annual rate of $2.7.Its current preferred stock price...

JJ firm issues preferred dividends at an annual rate of $2.7. Its current preferred stock price is $26.67. Assume that the equity beta for JJ is 0.54. The Yield on 10-year treasuries is 2.62%, and that the market risk premium for the year is 8%. The company's EPS expected growth is 2%. For this year, the dividends for JJ firm are the same for common and preferred stock; additionally the price for common stock is $32. What is the common cost of equity for JJ Firm using the CDGM method?

Expert Solution

As the dividends for JJ firm are the same for common and preferred stock for this year.

Annual dividend of equity (D0) = $2.7

Growth rate of EPS(g) = 2% (Note- Assuming growth rate of EPS and Dividends are same constantly)

Current price of Stock(P0) = $32

Calculating the cost of equity using Constant Dividend Growth Model(CDGM):-

Ke = 10.6063%

So, the common cost of equity for JJ Firm using the CDGM method is 10.61%

jeff jeffy answered 2 years ago

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