Keven works as a manager in Berta Inc.; He is trying to determine its cost of de

Question

Keven works as a manager in Berta Inc.; He is trying to determine its cost of debt. The firm has a debt issue outstanding with 10 years to maturity that is quoted at 91 percent of the face value. The issue makes semi-annual payments and has a coupon rate 10 percent annually.

Stock of Berta Inc. has a beta of 1.10. Return of market portfolio is 13 percent and t-bills are currently yielding 5 percent. The company has just paid $2.00 per share and dividends are expected to grow at 7 percent annual rate indefinitely. If the stocks are traded at $36 per share, then what is your best estimate of the Berta Inc.

Explanation / Answer

Cost of Debt

Cost of debt can be found by the following formula

Interest + (Reedeamble value - current value / n )/ Average value

or 3.0890 half yearly or 3.0890 * 2 = 6.178%

Cost of Equity :

We will use dividend discount method to calculate our cost of equity since we already have Dividend per share, current market price and growth rate

This can be done with the following formula

And under CAPM Method

Both estimates of the cost of equity seem reasonable. As the historical return on large capitalization stocks, the estimate from the CAPM model is about one percent higher than average, and the estimate from the dividend growth model is about one percent lower than the historical average, so we cannot definitively say one of the estimates is incorrect. Given this, we will use the average of the two, so: (.1283 + .1930 )/2 = =.160665 or 16.0665%

For the part:

Please give us the approximate shares outstanding in the market.

Related Questions

Navigate

• Browse (All)
• Browse K
• Subjects

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