1. 23.

Calculating the cost of equity [LO 14.1] Yarrawonga Industries shares has a beta of 1.08. The company just paid a dividend of $0.65, and the dividends are expected to grow at 4 per cent. The expected return on the market is 10.5 per cent, and Treasury notes are yielding 3.4 per cent. The most recent share price for the company is $72.

1. Calculate the cost of equity using the DCF method.

2. Calculate the cost of equity using the SML method.

3. Why do you think your estimates in

(a) and

(b) are so different?