Question

Question 13	Given the information below, calculate the firm's cost of equity for use in its calculation of its Weighted Average Cost of Capital. Assume that your firm has made the decision to weight the Capital Asset Pricing Model as 40% and the Constant Growth Dividend Discount Model as 60% in its calculations.
	Your answer:

Given Information:
Firm's Beta	0.81
Last Dividend Paid	$0.45
10-Year Treasury Yield	2.15%
Expected Dividend Growth Rate	4.20%
Market Risk Premium	5.50%
Current Stock Price	$25.73

Answer 1

Cost of equity using CAPM model = Rf+ [Market risk premium*Beta]

                                              = 2.15 + [5.5*.81]

                                               = 2.15 + 4.455

                                                = 6.605%

cost of equity using dividend discount model = [D0(1+g)/price] + g

                                  = [.45(1+.042)/25.73]+.042

                                   =[.45 *1.042 /25.73 ] +.042

                                     = .0182+.042

                                     = .06022 or 6.022%

Cost of capital for use in calculation of weighted average cost = [6.605*40%]+[6.022*60%]

                         = 2.64+ 3.62

                         = 6.26%