Cost of equity at constant growth rate with CAPM.
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:
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20x1=$1.39
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20x6=$1.95
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20x2=$1.48
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20x7=2.12
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20x3=1.60
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20x8=2.26
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20x4=1.68
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20x9=2.40
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20x5=1.79
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20y0=2.48
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This past earning 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. Constant growth rate dividend capitalization model approach
b. The capital asset pricing model approach