Fargo Fabrics: Cost of Equity Capital
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The following financial information is available on Fargo Fabrics, Inc.:
Current per-share market price = $20.25
Current per-share dividend = $1.12
Current per-share earnings = $2.48
Beta = 0.90
Expected market risk premium = 6.4%
Risk -free rate (20-year Treasury bonds) = 5.2%
Past 10 years earnings per share:
20X1 $1.39 20X6 $1.95
20X2 1.48 20X7 2.12
20X3 1.60 20X8 2.26
20X4 1.68 20X9 2.40
20X5 1.79 20Y0 2.48
The past-earnings growth trend is expected to continue for the foreseeable future. The dividend payout ratio has remained approximately constant over the past 10 years and is expected to remain at current levels for the foreseeable future.
Calculate the cost of equity capital using the following methods:
a. The constant growth rate dividend capitalization model approach
b. The Capital Asset Pricing Model approach
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Solution Summary
This solution provides guidelines on calculating the cost of equity capital using two model approaches.
Education
- BA, Ain Shams University, Cairo Egypt
- MBA, California State University, Sacramento
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