Question

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Suppose Big Tree Recycling Company has a beta of 1.2. The market risk premium is 8%...

Suppose Big Tree Recycling Company has a beta of 1.2. The market risk premium is 8% and the risk-free rate is 6%. The company’s last dividend was $2/share and this is expected to grow at 8% indefinitely. The stock currently sells for $30/share. What is Big Tree’s cost of equity capital based on the Dividend Pricing Model?

A. 15.2%
B. 15.4%

C. 15.6%

D. 14%

E. Can't tell since information is missing.

Solutions

Expert Solution

cost of equity Dividend pricing model = [ D0(1+g)/price] + g

                                                 = [2(1+.08)/30 ] +.08

                                                 = [2 * 1.08/30 ] + .08

                                                 = .072+.08

                                               = .152 or 15.2%

correct option is " A"

jeff jeffy answered 1 year ago
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