AAA Enterprises has just paid a dividend of 1.50.

If you expect the dividend to increase at 4%

forever, and you are now willing to pay 27.50 for
the stock. What is the implied required rate of
return?
BBB Corporation now wishes to calculate its cost
of common stock equity by using the CAPM. The
firm’s beta equals 1.5, the risk-free rate equals
8% and the market return equals 10%.

rs = 8% + [1.5 x (10% - 8%)]

rs = 8% + 3%
rs = 11%
CCC Corporation raised 300 million in fresh issue
of commons stocks. The issue price was 25 per
share, 4% of which was paid to the investment
bankers. The company is expected to pay 2 in
dividend per share next year. Dividends are
expected to increase by 5% per year. Calculate
the cost of new equity and compare it to the
cost of (existing) equity.
Cost of new equity

rn = 2
24 + 5%
rn = 13.3%
Cost of (Existing) Equity

rs = 2
25 + 5%
rs = 13%
Cost of new equity = 13.3%
Cost of (Existing) Equity = 13%

The flotation costs have increased cost of equity

by 0.3%.