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    Cost of Equity using DCF and SML

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    Walk me through the attached problem.
    Goetzmann Industries stock has a beta of 1.2. The company just paid a dividend of $.80, and the dividends are expected to grow at 5 percent. The expected return of the market is 13 percent, and Treasury bills are yielding 6 percent. The most recent stock price for Goetzmann is $53. a. Calculate the cost of equity using the DCF method.
    b. Calculate the cost of equity using the SML method.
    c. Why do you think your estimates in (a) and (b) are so different?

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    Solution Preview

    a. Calculate the cost of equity using the DCF method.
    Div1=(1+5%)*Div0= 0.84 =(1+5%)*$0.8
    Po= Div1/ (r-g)
    Div1 =dividend at the end of year= 0.84
    r=cost of equity= ?
    g=growth ...

    Solution Summary

    The solution provides steps for calculating cost of equity using DCF and SML.