The cost of equity using the CAPM approach The current risk-free rate of return

Question

The cost of equity using the CAPM approach The current risk-free rate of return (rRr) is 4.67%, while the market risk premium is 6.17%, the Burris Company has a beta of 0.78, using the Capital Asset Pricing Model (CAPM) approach, Burris's cost of equity is 9.48% 9.48% 11.38% 8.53% 9.95% The cost of equity using the bond yield plus risk premium appr The Lincoln Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company's cost of internal equity. Lincoln's bonds yield 11.52%, and the firm's analysts estimate that the firm's risk premium on its stock over its bonds is 3.55%. Based on the bond-yield-plus-risk-premium approach, Lincoln's cost of internal equity is: 18.84% ? 15.07% ? 18.08% ? 14.32% The cost of equity using the discounted cashflow (or dividend growth) approach Tucker Enterprises's stock is currently selling for $45.56 per share, and the firm expects its per-share dividend to be $2.35 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 Tucker's cost of internal equity? ? 13.05% 12.43% 11.81% 16.78%

Explanation / Answer

1. As per CAPM, cost of equity is Rf+b(Rm-Rf)

Therefore, cost of equity = 4.67+ 0.78*6.17

= 9.48%

2. Based on bond yield plus risk premium approach, cost of equity= bond yield + firms risk premium

= 11.52+3.55

= 15.07%

3. Using Gorden model P0=D1/(ke-g)

45.56=2.35/(ke-0.0727)

(Ke-0.0727)=2.35/45.56

Ke=12.43%

4. Since the amount distributed is 60% therefore amount retained is 40%

Therefore, growth rate is 12*40%= 4.8%

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