Question 2

Using a dividend growth model and the CAPM, what are the cost of equity estimates for the following stock, assuming that the stock market is in equilibrium: the stock price is $28.05, the expected dividend for t = 1 is $3.60 per share and the expected constant long-run growth rate is 6.10%. The risk-free rate of return is 4.40%, the market risk premium is 6.50%, and the beta of the stock is 1.92.

18.93% based on dividend growth model; 15.48% based on CAPM

16.05% based on dividend growth model; 16.88% based on CAPM

18.93% based on dividend growth model; 16.88% based on CAPM

16.05% based on dividend growth model; 15.48% based on CAPM