Compute the return on equity using dividend growth model

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Reference no: EM132056417

Biogenetics Corporation has a target capital structure of 60 % common stock and the rest on bonds. The risk-free rate is 5%, and the return on the stock market is 15%. This year, Biogenetics bonds had a YTM of 5.5%, and the company is on the 35 percent tax bracket. On last trading day, Biogenetics paid dividends of $3/share , which will grow at 3% every year. Last trading day the stock was selling at $30. The company beta is 1.5. a. Compute the return on the equity (Re) using the Dividend Growth Model (DGM), and the Security Market Line (SML). Show Calculation c. The company president has approached you about the company capital structure. He wants to know why the company doesn’t use more stock financing since it costs less than debt. What would you tell the president?

Reference no: EM132056417

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