Question
IBM expects to pay a dividend of $3 next year and expects these dividends to grow at 8% a year. The price of IBM is
IBM expects to pay a dividend of $3 next year and expects these dividends to grow at 8% a year. The price of IBM is $80 per share. Your estimate of the market risk premium is 9%. The risk-free rate of return is 4.1% and IBM has a beta of 1.5.
a. What is IBM cost of equity capital using the CDGM?
b. What is IBM cost of equity capital using the CAPM?
c. What growth rate would be necessary to make the answers converge?
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Intermediate Accounting
Authors: J. David Spiceland, James Sepe, Mark Nelson
6th edition
978-0077328894, 71313974, 9780077395810, 77328892, 9780071313971, 77395816, 978-0077400163
