chapter 10 7. Quantitative Problem: Barton Industries estimates its cost of comm

Question

chapter 10

7. Quantitative Problem: Barton Industries estimates its cost of common equity by using three approaches: the CAPM, the bond-yield-plus-risk-premium approach, and the DCF model. Barton expects next year's annual dividend, D1, to be $1.50 and it expects dividends to grow at a constant rate g = 4.8%. The firm's current common stock price, P0, is $28.00. The current risk-free rate, rRF, = 4.5%; the market risk premium, RPM, = 5.8%, and the firm's stock has a current beta, b, = 1.2. Assume that the firm's cost of debt, rd, is 7.01%. The firm uses a 3.8% risk premium when arriving at a ballpark estimate of its cost of equity using the bond-yield-plus-risk-premium approach. What is the firm's cost of equity using each of these three approaches? Round your answers to 2 decimal places.

Explanation / Answer

Using CAPM, cost of equity = 4.5% + (5.8%-4.5%)*1.2 =6.06%

Using the bond-yield-plus-risk-premium approach ,ks= long-term bond yield + risk premium = 7.01 + 3.8 = 10.81%

Using DCF method, DCF = CF1/(1+r)1 + CF2/(1+r)2 + CF3/(1+r)3 ...+ CFn/(1+r)n

Please do promote me and refer to me, Don't worry.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.