Question: Calculating the Cost of Equity. Pierce Industries stock has a beta of 1.08. The company just paid a dividend of $1.05, and the dividends are expected to grow at 4 percent. The expected return on the market is 10.9 percent, and Treasury bills are yielding 3.8 percent.
The most recent stock price is $83.
a. Calculate the cost of equity using the dividend growth model 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?