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18 November, 17:53

Southern Home Cooking just paid its annual dividend of $.75 a share. The stock has a market price of $16.80 and a beta of 1.14. The return on the U. S. Treasury bill is 2.7 percent and the market risk premium is 7.1 percent. What is the cost of equity

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  1. 18 November, 20:15
    0
    The multiple choices are:

    9.98 percent

    10.04 percent

    10.79 percent

    10.37 percent

    10.45 percent

    The third option of 10.79% is correct

    Explanation:

    The cost of equity according to Miller and Modgiliani capital asset pricing model is given below:

    Ke=Rf+beta * (Mrp-Rf)

    Rf is the risk free rate which is the return on government security is 2.7%

    beta is 1.14

    Mrp is the market risk premium is 7.1% which is given in the formula as (Mrp-Rf)

    Ke=2.7%+1.14*7.1%

    Ke=2.7%+8.09%

    Ke=10.79%

    Hence the correct option out of the options given above is the third option

    It is expected that any shareholder that invests in the shares of Southern Home Cooking would get return of 10.79%
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Home » Business » Southern Home Cooking just paid its annual dividend of $.75 a share. The stock has a market price of $16.80 and a beta of 1.14. The return on the U. S. Treasury bill is 2.7 percent and the market risk premium is 7.1 percent.
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