The attached photo is a study tool. Why are they not (5%-4%) subtracting the growth rate from the market return?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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The attached photo is a study tool. Why are they not (5%-4%) subtracting the growth rate from the market return?

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WHAT YOU NEED TO KNOW
The stock of Canadian Ski Wear is currently trading at $45 a share and the beta of the company is estimated to be 1.3. The
company is expected to pay a dividend of $1.50 a share next year, and this dividend is expected to grow at a rate of 4%
per year. The rate on the 10-year U.S. Treasury bond is 4% and you estimate the market risk premium to be 5%. Using the
CAPM, the company's cost of common stock is 10.5%. To compute the cost using CAPM you use the following model and
inputs:
Kcs = rf + B(rm -rf)
Kes = cost of common stock
If risk-free rate
B = Beta
Im = expected return on the market
So, Cost of common stock = 4% + 1.3(5%) = 10.5%
Transcribed Image Text:WHAT YOU NEED TO KNOW The stock of Canadian Ski Wear is currently trading at $45 a share and the beta of the company is estimated to be 1.3. The company is expected to pay a dividend of $1.50 a share next year, and this dividend is expected to grow at a rate of 4% per year. The rate on the 10-year U.S. Treasury bond is 4% and you estimate the market risk premium to be 5%. Using the CAPM, the company's cost of common stock is 10.5%. To compute the cost using CAPM you use the following model and inputs: Kcs = rf + B(rm -rf) Kes = cost of common stock If risk-free rate B = Beta Im = expected return on the market So, Cost of common stock = 4% + 1.3(5%) = 10.5%
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