Yahoo Finance has reported JWU Construction\'s equity beta to be 1.1. The 10yr T

Question

Yahoo Finance has reported JWU Construction's equity beta to be 1.1. The 10yr Treasury is currently yielding 2.5%. The historical risk premium for the construction industry is 6.5%. What is JWU Construction's Cost of Equity.

a. 5.5%

b. 9.65%

c. 9.25%

JWU Manufacturing is a “darling” of Wall Street analysts. Its current market price is $15 per share, and its book value is $5 per share. Analysts forecast that the firm’s book value will grow by 10 percent per year indefinitely, and the cost of equity is 15 percent. Given these facts, what is the market’s expectation of the firm’s long-term average ROE?

a. 20%

b. 25%

c. 30%

Explanation / Answer

1) b.9.65%

E(Ri) = RF + bi [E(RM) – RF]  

= 2.5% + 1.1 ( 6.5%)

= 9.65%

2) b) 25%

ROE = rE + (rE - g )* (ve*- se) / se

ROE = 15% + ( 15% - 10% ) * ( 15 - 5 ) / 5 = 25%

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