Part A . Estimating the Implied Cost of Equity Capital

Assume that a companys beginning-of-period price is $10 per common share, its dividends are $0.45 per share, and its end-of-period price is $10.50 per common share. What is the companys expected cost of equity capital?

Round answer to one decimal place (ex: 0.0245 = 2.5%)

Part B. Procter and Gamble (PG) has a June fiscal year-end. On June 30, 2006, analysts expected the company to pay $1.30 dividends per share in fiscal year 2007. The company's market beta is estimated to be 0.7. Assume that the risk-free rate is 4.9% and the market premium is 5%. During fiscal year 2006, the company's sales growth was 20.2%. However, analysis reveals that P&G's fiscal 2006 sales include eight months of sales from Gillette after its acquisition by P&G during 2006. Footnotes report pro forma sales that show what the income statement would have reported had Gillette's full-year sales been included in both 2005 and 2006specifically, P&G's sales growth would have been 4.4%. (a) Estimate P&G's cost of equity capital using the CAPM model. (Round your answer to one decimal place.)%

(b) Using your rounded answer from (a), estimate P&G's intrinsic value using the DDM model assuming that dividends per share are projected at $1.30 per share after 2007. (Hint: Apply the DDM model with constant perpetuity.) (Round your answer to two decimal places.)

(C) On June 30, 2006, the stock of P&G was priced at $55.60 per share. Infer the market expectation about the future growth rate of P&Gs dividend using the DDM model with an increasing perpetuity and the rounded cost of equity capital computed in (a).