You are looking to purchase some Sandy Olsson Corp. stock. You estimated that Sandy's beta is 1.3 and her tax rate is 30%. Currently the expected return on the market is 10% and the US T-bill is yielding 3%.
What is the appropriate cost of equity?
The stock is currently trading at $30 per share. Last week, the stock paid a dividend of $2.
The dividends have been growing at 10% annually for the past 5 years. You expect this growth rate is not sustainable forever.
You only expect this rate to continue for 5 years. Then the growth should taper down to 3% per year thereafter. Should you buy the stock? Why?