Tri-County Inc. pays an annual common stock dividend of $1.80 per share. The dividend has shown a constant growth rate over the past 5 years from $1.10 to its present level. This growth trend is expected to continue. The company's dividend payout ratio is also expected to continue at 30 percent. The current price to earnings multiple is 12 (the stock sells for 12 times its current earnings).
Tri-County has a consistent beta of 1.25. The present risk-free rate is 2.75 percent, and the expected return on the market is 9 percent.
Answer the following questions:
A. If an investor believes that 22 percent is an acceptable rate of return for the level of risk of Tri-County's stock, determine, using the dividend capitalization model and the Capital Asset Pricing Model (CAPM), whether this investor should purchase Tri-County stock. Show you work.
B. Calculate the company's cost of equity capital using both the dividend capitalization model and the CAPM approach. Show your work