Cost of Equity. Bunkhouse Electronics is a recently incorporated firm that makes electronic entertainment systems. Its earnings and dividends have been growing at a rate of 30 percent, and the current dividend yield is 2 percent. It beta is 1.2, the market risk premium is 8 percent, and the risk-free rate is 4 percent.
a. Calculate two estimates of the firm's cost of equity?
b. Which estimate seems more reasonable to you? Why?
a. Calculate two estimates of the firm's cost of equity.
The two estimates can be made using
1. The dividend discount model which gives the
Cost of equity = D1/MP + g
where D1/MP is the dividend yield and g is the ...
The solution explains how to calculate the cost of equity using two methods