I need help finding the following given the information provided: Cost of Equity
ID: 2808665 • Letter: I
Question
I need help finding the following given the information provided:
Cost of Equity given the Risk-Free Rate is 4%, the Equity Risk Premium is 6%, and the Beta is 1.2
The stock value today given the terminal value per share is 30.80, the dividends per share for the next 5 years are .48, .58, .88, 1.2, 1.54
And how to find Cash Flows if I have the dividends paid, net income, tax for the next 5 years.
And if it is impossible with the information provided, what information must I find to find those 3 values
Explanation / Answer
Cost of Equity (Ke)
As per Capital Asset Pricing Model [CAPM], The Cost of Equity shall be computed by using the following equation
Cost of Equity [ke] = Rf + B[Rm-Rf]
Where; Rf = Risk free rate
B = Beta of the stock
(Rm – Rf) = Market Risk Premium
In this given question, we have Rf = 4%
Beta = 1.2
(Rm – Rm) = 6%
After substituting the given data into the equation,
Cost of Equity [Ke] = Rf + B[Rm-Rf]
= 4% + [1.2 x 6%]
= 4% + 7.2%
= 11.2%
“Therefore, the Cost of Equity = 11.2%”
Stock Value Today
The Value of the stock today is the aggregate of the present value of the future dividends and the terminal value
Therefore, Current Share Price = D1/(1 + r) 1 + D2/(1 + r)2 + D3/(1 + r)3 ++ D4/(1 + r)4 + D5/(1 + r)5 + TV/(1 + r)5
= $0.48/(1 + 0.112)1 + $0.58/(1 + 0.112)2 + $0.88/(1 + 0.112)3 + $1.2/(1 + 0.112)4+ $1.54/(1 + 0.112)5 + $30.80/(1 + 0.112)5
= $0.43 + 0.47 + 0.64 + 0.78 + 0.91 + 18.11
= $21.35
“Hence, the Stock Value Today = $21.35”
Information Required to find out the cash flows
-As we know the cash flow is computed by using the following formula
-Cash Flow = Net Income after Tax + Non-cash Expenses
-Non-cash expenses are those expenses which does not have any outflow of cash. some examples of non-cash expenses are depreciation, amortization charges, etc
-Here, the dividend paid is not required to find out the cash flow for the year
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.