Engineering Economy 7th Edition by Leland Blank ,Anthony Tarquin

Exercise 3

Management at Hirschman Engineering has asked you to determine the cost of equity capital based on the company's common stock. The company wants you to use two methods: the dividend method and the CAPM. Last year, the first year for dividends, the stock paid $0.75 per share on the average of $11.50 on the New York Stock Ex­change. Management hopes to grow the dividend rate at 3% per year. Hirschman Engineering stock has a volatility that is higher than the norm at 1.3. If safe investments are returning 5.5% and the 3% growth on common stocks is also the premium above the risk-free investments that Hirschman Engineering plans to pay, calculate the cost of eq­uity capital using the two methods.