Chapter 13, Problem 19QAP

a

Summary Introduction

Adequate information:

Beta of the stock $\left(\text{β}\right)$ = 1.15

Dividend per share $\left(\text{D1}\right)$ = $0.75

Growth rate of stock $\left(\text{g}\right)$ = 4.5%

Market return of the stock $\left({\text{R}}_{\text{M}}\right)$ = 11%

T-bill rate $\left({\text{R}}_{\text{f}}\right)$ = 3.7%

Beta of the stock $\left({\text{P}}_{\text{S}}\right)$ = $84

To compute: Cost of equity using DDM method for the compant M.

Introduction: The Cost of equity refers to the compensation made to the investors for bearing the risk of ownership. The dividend discount model (DDM) is a method used for determining the price of a stock and its based on future dividend payments.

b

Summary Introduction

Adequate information:

Beta of the stock $\left(\text{β}\right)$ = 1.15

Dividend per share $\left(\text{D1}\right)$ = $0.75

Growth rate of stock $\left(\text{g}\right)$ = 4.5%

Market return of the stock $\left({\text{R}}_{\text{M}}\right)$ = 11%

T-bill rate $\left({\text{R}}_{\text{f}}\right)$ = 3.7%

Beta of the stock $\left({\text{P}}_{\text{S}}\right)$ = $84

To compute: Cost of equity using SML method for the compant M.

Introduction: Cost of equity refers to the compensation made to the investors for bearing the risk of ownership. The capital asset pricing model (CAPM) is a method used for determining the price of a stock based on the relationship between expected return and risk.

c

Summary Introduction

To determine: Difference in estimates sub-part (a) and sub-part (b)

Introduction: The dividend discount model (DDM) is a method used for determining the price of a stock based on future dividend payments. The capital asset pricing model (CAPM) is a method used for determining the price of a stock based on the relationship between expected return and risk.