Calculating the Cost of Equity Floyd Industries stock has a beta of 1.15. The company just paid a dividend of $.85, and the dividends are expected to grow at 4.5 percent per year. The expected return on the market is 11 percent, and Treasury bills are yielding 3.9 percent. The most recent stock price for the company is $76.
a. Calculate the cost of equity using the DDM 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?