Problem:
Ajax, Inc. has common stock outstanding that has a market price of $48 per share. Last year's dividend was $2.25 and is expected to grow at a rate of 4% per year, forever. The expected risk-free rate of interest is 2%, and the expected market premium is 5.5%. The company's beta is 1.2.
Requirement:
Question 1: What is the cost of equity for Ajax using the dividend valuation model?
Question 2: What is the cost of equity for Ajax using the capital asset pricing model (CAPM)?
Note: Please provide equation and explain comprehensively and give step by step solution.