Cost of equity using capm and dividend growth model

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Reference no: EM132054162

The equity of Ruby Developments has a beta of 0.9. The earnings of Ruby are expected to grow at 5 per cent indefinitely. Ruby maintains a constant

payout ratio. The risk-free rate is 4 per cent and the expected return on the market is 12 per cent. Its last dividend was 20 cents per share and a share

is currently selling for $3.40.

a. Calculate the cost of equity using the CAPM and the dividend growth model. Comment on the results.

b. If the cost of Ruby 's debt is 8 per cent, the target debt–equity ratio is 1:3 and the current tax rate is 30 per cent, what is the weighted average cost

of capital for Ruby?

Reference no: EM132054162

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