Current share market price= $20.25 per share
Current share dividend= $1.12 per share
Current share earnings= $2.48 per share
Beta= 0.90
Expected market risk premium= 6.4%
Risk free rate [20 year treasury bonds] = 5.2%
Past ten 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
This past earning growth trend is expected to go on for the foreseeable future. The dividend payout ratio has remained approximately constant over the last ten years & is expected to remain at current levels for the foreseeable future.
Compute the cost of equity capital using the following methods:
[A] Constant growth rate dividend capitalization model approach
[B] The capital asset pricing model approach