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28 July, 00:56

The market rate of return is 10.8 percent and the risk-free rate is 4.45 percent. Galaxy Co. has 17 percent more systematic risk than the overall market and has a dividend growth rate of 5.5 percent. The firm's stock is currently selling for $39 a share and has a dividend yield of 3.8 percent. What is the firm's cost of equity?

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  1. 28 July, 03:29
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    Average firm equity is 10.55 %

    Explanation:

    Given dа ta:

    Rate of return is 10.8 %

    risk free rate is 4.45%

    systematic risk is 17%

    Dividend rate is 5.5%

    Cost of stock is $39 a share

    Dividend yield is 3.8%

    common stock (dividend growth) = dividend yield + dividend rate

    = 0.038 + 0.055 = 0.093 = 9.30%

    common stock (CAPM) = risk free rate + 1.17 * (rate of return - risk free rate)

    common stock (CAPM) = 0.0445 + 1.17 * (0.108 - 0.0445) = 0.118 = 11.8%

    Average firm equity is = / frac{ 11.8 + 9.30}{2} = 10.55 %
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