Question #5
Reading: Reading 17 Cost of Capital - Advanced Topics
PDF File: Reading 17 Cost of Capital - Advanced Topics.pdf
Page: 2
Status: Unattempted
Question
Currently the market index stands at 1,190.45. Firms in the index are expected to pay cumulative dividends of 35.71 over the coming year. The consensus 5-year earnings growth forecast for these firms is expected to increase to 6.2% up from last year's forecast of 4.5%. The long-term government bond is yielding 5.0%. According to the Gordon growth model, what is the equity risk premium?
Answer Choices:
A. 4.2%
B. 1.2%
C. 2.5%
Explanation
Equity risk premium = (35.71 / 1,190.45) + (6.2%) – 5.0% = 4.2%