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    Calculation of Cost of Equity

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    A company's EPS are $2.00 and has a 60% pay-out ratio. Dividends are expected to grow at 7% per year. Its stock beta is 1.2, the risk free rate is 6% and the average return on equity in the market is 12%.

    a. What is the firm's cost of equity?

    b. What is the most you should be willing to pay for a share of its stock?

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    Solution Preview

    A company's EPS are $2.00 and has a 60% pay-out ratio.

    a. What is the firm's cost of equity?Ã? 

    =Risk free rate + Beta * (Return on ...

    Solution Summary

    The solution helps in estimating Cost of Equity.

    $2.19