LaForge\'s common stock is currently selling for $50 a share. Its last dividend
ID: 2752271 • Letter: L
Question
LaForge's common stock is currently selling for $50 a share. Its last dividend was $4.19, and dividends are expected to grow at a constant rate of 5% in the forseeable future. LaForge's beta is 1.2, and its yield on a T-bond is 5%, and the market risk premium is estimated at 5%. For the bond yield plus risk premium approach, use a maximum risk premium.
A. What is LaForge's estimated cost of common equity based on the CAPM approach? [ Select ] [".142", ".060", ".160", ".110"]
B. What is LaForge's estimated cost of common equity using the DCF approach? [ Select ] [".060", ".07", ".090", ".138"]
C. What is the bond yield plus risk premium estimate to LaForge's cost of common equity? [ Select ] [".07", ".14", ".13", ".10"]
Explanation / Answer
A. Cost of Equity as per CAPM = Risk free rate + (Market Risk Premium x Beta)
= 5 + (5x1.2)
= 11%
= 0.11
B.
Ke = Dividend next year / Price per share + Growth
= (4.19x1.05 ) / 50 + 0.05
= 0.138
C. Bond Yield plus risk premium = 5 + 5
= 10%
= 0.10
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