Response to the following problem:
Capital asset pricing model and dividend valuation model
Eaton Electronic Companys treasurer uses both the capital asset pricing model and the dividend valuation model to compute the cost of common equity (also referred to as the required rate of return for common equity).
Assume: Rf = 5% Km = 10% ? = 1.2 D1 = $.80 Po = $20 g = 7%
a. Compute Ki (required rate of return on common equity based on the capital asset pricing model).
b. Compute Ke (required rate of return on common equity based on the dividend valuation model).