Answer to Question #122743 in Finance for Reema

Question #122743
Suppose our company has a beta of 1.5. The market risk premium is expected to be 9%, and the current risk-free rate is 6%.
•We have used analysts’ estimates to determine that the market believes our dividends will grow at 6% per year and our last dividend was $2.
•Our stock is currently selling for $15.65. What is our cost of equity?
1
Expert's answer
2020-06-18T13:01:09-0400

There are two ways to compute the cost of equity:

Using Security Market Line (SML)

E(Ri) = Rf + βi * [E(Rm) – Rf]

where

E(Ri) = Expected return on asset

Rf = Risk-free rate of return

βi = Beta of asset

E(Rm) = Expected market return

=19.5%

The cost is thus approximately 19.5%


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