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Unformatted text preview: 1 Ch 14 Inclass Exercises Solutions 1. Exercise: Cost of Equity using Dividend Constant Growth Model (DGM) Suppose that your company is expected to pay a dividend of $2.00 per share next year. There has been a steady growth in dividends of 6% per year and the market expects that to continue. The current price is $30. What is the cost of equity? Dividend Constant Growth Model (DGM) Dividend 2.00 PV - Current Price 30.00 g - Expected growth rate of dividends 6.00% Using last paid dividend (Usually D ) Expected Dividend Yield 7.07% Expected Capital Gains Yield 6.00% R - Required return 13.07% Using next expected dividend (Usually D 1 ) Expected Dividend Yield 6.67% Expected Capital Gains Yield 6.00% R - Required return 12.67% The cost of equity = ______________ (12.67%) 2. Exercise: Estimating the Dividend Growth Rate One method for estimating the growth rate is to use the historical average Year Dividend %chg 2006 1.75 2007 1.81 3.43% 2008 1.88 3.87% 2009 1.92 2.13% 2010 1.97 2.60% Average = 3.01% Average = _______ (3.01%) 3 . Exercise: Cost of Equity using SML or CAPM Suppose your company has an equity beta of .78 and the current risk-free rate is 4.1%. If the expected market risk Suppose your company has an equity beta of ....
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This note was uploaded on 11/29/2011 for the course FINANCE 332 taught by Professor Linney during the Fall '11 term at Guilford Tech.
- Fall '11