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What is the cost of equity for Bunkhouse Electronics?

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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. Its 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?

(Please show the work for how you determine the answers to a above.)

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Solution Summary

The solution explains how to calculate the cost of equity using two methods with complete calculations.

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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 = dividend yield and ...

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