Asgard Industries stock has a beta of 1.03. The company just paid a dividend of $0.7, and the dividends are expected to grow at 6.2 percent indefinitely. The expected return on the market is 13.3 percent, and Treasury bills are yielding 3.8 percent. The most recent stock price for the company is $9.04. Calculate the cost of equity using the Dividend Growth Model (DGM) method.Note: Do not round intermediate calculations and enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16 and not 32.16% or 0.3216).FIN256-2025-Fall-Final-Blank.xlsx

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BlackTom AI · Accepted Answer

Question restatement: Asgard Industries stock has a beta of 1.03. The company just paid a dividend of $0.70, and the dividends are expected to grow at 6.2% indefinitely. The expected return on the market is 13.3%, and Treasury bills yield 3.8%. The most recent stock price is $9.04. Calculate the cost of equity using the Dividend Growth Model (DGM). Note: Do not round intermediate calculations and enter your answer as a percentage rounded to 2 decimal places.

Step 1: Recognize the formula to use. For the Dividend Growth Model (Gordon growth model), the cost of equity ke is given by ke = (D1 / P0) + g, where D1 is the next expected dividend, P0 is the current stock price, and g is the dividend growth rate.

Step 2: Compute the next dividend D1. The most recent dividend D0 is $0.70 and it is expected to grow at 6.2% indefinitely. Therefore D1 = D0 × (1 + g) = 0.70 × (1 + 0.062) = 0.70 × 1.062 = 0.7434 dollars.

Step 3: Divide D1 by the current price P0. We have D1 = 0.7434 and P0 = 9.04. Compute the ratio D1 / P0 = 0.7434 / 9.04. This yields approximately 0.0822 (8.22%).

Step 4: Add the growth rate g to the payout ratio. g = 6.20% = 0.062. Adding gives ke ≈ 0.0822 + 0.062 = 0.1442, or 14.42% when expressed as a percentage.

Step 5: Rounding considerations. The instruction requests 2 decimal places. Using the calculated value, ke ≈ 14.42%. Depending on minor rounding in intermediate steps, you might see a result like 14.41% or 14.42%; both are consistent with the DGM calculation. The key is to keep D1 precise (0.7434) and use the exact P0 and g in the final rounding step.

Notes on potential distractions: The beta of the stock, the market return, and the risk-free rate are not used in the Dividend Growth Model formula ke = (D1 / P0) + g. Those inputs are relevant for CAPM-based cost of equity, not the DGM approach. The problem explicitly asks for the DGM result, so the CAPM components are not incorporated here.

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类似问题

Company ABC’s ordinary shares are currently selling at​ $24.00 per share. The company is expected to pay a dividend of​ $1.92 per share, which is predicted to grow at ​ 4% per annum forever. What is the​ share's expected rate of​ return?

Company ABC’s ordinary shares are currently selling at​ $24.00 per share. The company is expected to pay a dividend of​ $1.92 per share, which is predicted to grow at ​ 4% per annum forever. What is the​ share's expected rate of​ return?

Is the following statement true or false? Déjà vu’ just paid a cash dividend of $0.20 per share. Investors require a 16% return from investments such as this. If the dividend is expected to grow at a steady 8% per year. The share will be worth $2.70 in five years?[Fill in the blank]

Is the following statement true or false? Déjà vu’ just paid a cash dividend of $0.20 per share. Investors require a 16% return from investments such as this. If the dividend is expected to grow at a steady 8% per year. The share will be worth $2.70 in five years?[Fill in the blank]

The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will:

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希望你的学习变得更简单

Company ABC’s ordinary shares are currently selling at $24.00 per share. The company is expected to pay a dividend of $1.92 per share, which is predicted to grow at 4% per annum forever. What is the share's expected rate of return?

Company ABC’s ordinary shares are currently selling at $24.00 per share. The company is expected to pay a dividend of $1.92 per share, which is predicted to grow at 4% per annum forever. What is the share's expected rate of return?