The return on the market is 11%. A firm’s beta is 1.4, and the risk-fr

The return on the market is 11%. A firm’s beta is 1.4, and the risk-free rate is 6%. The stock is currently selling for $18 and the next dividend is expected to be $1.75. The firm’s growth rate is 5%.

The pre-tax cost of debt is 10% and the equity risk premium is 5%. Estimate the cost of equity by taking an average of the three methods to determine the cost of equity.
A) 15.0%
B) 14.2%
C) 13.0%
D) 14.7%
E) 11.5%

ANSWER

B