Calculating the Cost of Equity Gabriel Industries stock has a beta of 1.12. The company just...

Calculating the Cost of Equity Gabriel Industries stock has a beta of 1.12. The company just paid a dividend of $1.15, and the dividends are expected to grow at 4 percent. The expected return on the market is 11.4 percent, and Treasury bills are yielding 3.8 percent. The most recent stock price is $85.

a. Calculate the cost of equity using the dividend growth model method.

b. Calculate the cost of equity using the SML method.

c. Why do you think your estimates in (a) and (b) are so different?

Expert Solution

a) cost of equity using DDM = 5.41%

b) cost of equity using SML = 12.31%

jeff jeffy answered 1 year ago

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