Mumbai University Marketing Cost of Equity Questions

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Go to the following website (Yahoo Finance!; you can use the tab at left) and type in the ticker symbol of a company (you may use any company that pays a dividend; the dividend rate will be on the summary page.  If it says NA, pick another company) in the “Get Quotes” box;

After you have pulled up information on the firm, use the data you find there (you will need the stock price, beta, and the dividend yield from this summary page) to compute a cost of common equity using the capital asset pricing model and the growth model. You know that the cost of common equity is equal to the investors’ required rate of return on the stock, so we can use information from chapter 7 to calculate the cost of equity.  

1.  Use the CAPM to calculate the cost of common equity.  For the risk-free return, use the 3-month treasury bill rate which can be found under “Market Data”, and then “Bonds”.  Use 7% for a long-term market return.

2. What does this indicate about the risk of holding the stock? 

3. Go to the link for “Balance Sheet” and use the basic accounting equation (Assets = Liabilities + Owner’s Equity) and the most recent data posted to proxy the company’s target capital structure. What is the weight of debt and equity?

4. Identify the information needed to compute a cost of common equity using the constant growth model (solving for k, k=(D/P)+g).  The dividend yield is calculated for you (D/P) so you can pull that number directly from the site and then simply add it to the growth rate. You can proxy the growth rate for the company by using the “Analyst” estimate for the next five years (at the bottom of the Analyst page). 

5. Does it differ from what you found using the CAPM method?  Why?