The cost of equity using the CAPM approach The current risk-free rate of return
ID: 2783765 • Letter: T
Question
The cost of equity using the CAPM approach The current risk-free rate of return (nr) is 3.86%, while the market risk premium is 6.63%, the Burris a beta of 0.92. Using the Capital Asset Priding Model (CAPM) approach, Burris's cost of equity is Company has The cost of equity using the bond yield plus risk premium approach The Jackson Company is closely held and, therefore, cannot generate relilable inputs with which to use the CAPM method for estimating a company's cost of internal equity. Jackson's bonds yield 1.52%, and the firm's analysts estimate that the firm's risk premium on its stock over its bonds is 4.95%. Based on the bond-yield-plus-risk-premium approach, Jackson's cost of internal equity is: 19.76% 16.47% 15.65% 20.59% The cost of equity using the discounted cashflow (or dividend growth) approach Enterprises's stock is currently selling for $25.67 per share, and the firm expects its per-share dividend to be Ford $1.38 in one year. Analysts project the firm's growth rate to be constant at 7.27%. Using the cost of equity using the discounted cashflow (or dividend growth) approach, what is Ford's cost of internal equity? 13.28% 0 12.65% O 17.08% 12.02% Estimating growth rates weil 3000 is parsing the page please wait.Explanation / Answer
Answer 1.
Risk-free rate of return, rRF = 3.86%
market risk premium, rMRP = 6.63%
beta, b = 0.92
Cost of Equity = rRF + b * rMRP
Cost of Equity = 3.86% + 0.92 * 6.63%
Cost of Equity = 9.96%
So, Cost of equity is 9.96%
Answer 2.
Cost of Internal Equity = Bond Yield + Risk premium
Cost of Internal Equity = 11.52% + 4.95%
Cost of Internal Equity = 16.47%
Answer 3.
Current Price, P0 = $25.67
Year-end Dividend, D1 = $1.38
growth rate, g = 7.27%
Cost of Internal Equity = D1 / P0 + g
Cost of Internal Equity = $1.38 / $25.67 + 0.0727
Cost of Internal Equity = 0.1265
Cost of Internal Equity = 12.65%
Answer 4.
Payout Ratio = 70.0%
ROE = 18.0%
Growth rate = ROE*(1 - Payout Ratio)
Growth rate = 18.0%*(1 - 0.70)
Growth rate = 5.40%
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