ADK Industries Common Shares Sell for $60 Per Share

Multiple Choice

ADK Industries common shares sell for $60 per share. ADK expects to set their next annual dividend at $3.75 per share. If ADK expects future dividends to grow at 9 percent per year, indefinitely, the current risk-free rate is 4 percent, the expected rate on the market is 11 percent, and the stock has a beta of 1.5, what should be the best estimate of the firm's cost of equity?

A) 15.25 percent
B) 15.03 percent
C) 14.50 percent
D) 14.88 percent
E) 15.03 percent Step 1: Find the cost of equity using constant-growth formula: 3.75/60 + 0.09 = 15.25 percent.Step 2: Find the cost of equity using CAPM: 4 + 1.5(11 - 4) = 14.5 percent.