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Question
Use the following information to answer the following question(s).Berlioz Inc. is trying to estimate its cost of common equity, and it has the following information. The firm has a beta of 0.90, the before-tax cost of the firm's debt is 7.75%, and the firm estimates that the risk-free rate is 4% while the current market return is 12%. Berlioz stock currently sells for $35.00 per share. The firm pays dividends annually and expects dividends to grow at a constant rate of 5% indefinitely. The most recent dividend per share, paid yesterday, is $2.00. Finally, the firm has a marginal tax rate of 34%.
The cost of common equity using the dividend-growth model is:
A) 11.00%.
B) 11.32%.
C) 11.50%.
D) 11.72%.
Answer
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