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29 July, 01:19

Epley Industries stock has a beta of 1.30. The company just paid a dividend of $.30, and the dividends are expected to grow at 4 percent. The expected return on the market is 13 percent, and Treasury bills are yielding 6.3 percent. The most recent stock price for the company is $80. a. Calculate the cost of equity using the DCF method. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.) DCF method % b. Calculate the cost of equity using the SML method. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.) SML method

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  1. 29 July, 03:02
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    The cost of equity using the DCF method: 4.39%.

    The cost of equity using the SML method: 15.01%.

    Explanation:

    a. The cost of equity using the DCF method:

    We have: Current stock price = Next year dividend payment / (Cost of equity - Growth rate) Cost of equity = Next year dividend payment/Current stock price + Growth rate = 0.3 x 1.04/80 + 4% = 4.39%.

    b. The cost of equity using the SML method:

    Cost of equity = Risk free rate + beta x (Market return - risk free rate); in which Risk free rate is rate on T-bill.

    => Cost of equity = 6.3% + 1.3 x (13% - 6.3%) = 15.01%.
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