problem: The financial information is available on Fargo Fabrics, Inc.:
Current per-share market price = $20.25
Current per-share dividend = $1.12
Current per-share earnings = $2.48
Beta = 0.90
Expected market risk premium = 6.4 percent
Risk-Free rate (20 year Treasury bonds) = 4.2 percent
Past ten years earnings per share:
|
20X1
|
$1.39
|
20X6
|
$1.95
|
|
20X2
|
1.48
|
20X7
|
2.12
|
|
20X3
|
1.6
|
20X8
|
2.26
|
|
20X4
|
1.68
|
20X9
|
2.4
|
|
20X5
|
1.79
|
20Y0
|
2.48
|
The past -earnings growth trend is expected to continue for the foreseeable future. The dividend payout ratio has remained approximately constant over the past ten years and is expected to remain at current levels for the foreseeable future. Determine the cost of equity capital using the following methods:
[A] The Capital Asset Pricing Model approach
[B] The constant growth rate dividend capitalization model approach