Underestimated Inc.’s common shares currently sell for $33 each. The firm’s mana

Question

Underestimated Inc.’s common shares currently sell for $33 each. The firm’s management believes that its shares should really sell for $59 each. The firm just paid an annual dividend of $2 per share and management expects those dividends to increase by 6 percent per year forever (and this is common knowledge to the market).

What is the current cost of common equity for the firm? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)

The current cost of common equity for the firm

What does management believe is the correct cost of common equity for the firm? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)

Underestimated Inc.’s common shares currently sell for $33 each. The firm’s management believes that its shares should really sell for $59 each. The firm just paid an annual dividend of $2 per share and management expects those dividends to increase by 6 percent per year forever (and this is common knowledge to the market).

Explanation / Answer

a) The current cost of common equity for the firm Annual dividend $       2 Price of the share $     33 Grwoth rate 6% Cost of the firm = ((D1 x (1+g))/Price) + g ((2*(1+.06))/33)+.06 12.42% b) Annual dividend $       2 Price of the share $     59 Grwoth rate 6% Cost of the firm = ((D1 x (1+g))/Price) + g ((2*(1+.06))/59)+.06 9.59%

Related Questions

Navigate

• Browse (All)
• Browse U
• Subjects

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