Question

Sierra Corporation has just paid a dividend of $2 per share, and its dividends are expected...

Sierra Corporation has just paid a dividend of $2 per share, and its dividends are expected to grow at a steady rate of 6% for the foreseeable future. The firm’s shares are currently selling for $30 per share, with an equity beta of 1.2. The risk-free rate is 5% and expected market return is 12%. What is the firm’s estimated cost of equity if we were to calculate it as the average of the costs of equity from the dividend growth model and the security market line?

Select one:

a. 13.07%

b. 13.23%

c. 13.43%

d. 14.23%

e. 14.37%

Homework Answers

Answer #1

b. 13.23%

Cost of equity using the security market line = Risk-free rate + Beta(Market return - Risk-free rate)

Cost of equity using the security market line = 0.05 + 1.2(0.12 - 0.05)

Cost of equity using the security market line = 0.134 or 13.4%

Cost of equity using the gordon dividend growth model = [D0(1 + g) / P0] + g

Cost of equity using the gordon dividend growth model = [$2(1.06) / $30] + 0.06

Cost of equity using the gordon dividend growth model = 0.130667 or 13.0667%

Now we have two diferent rates, so we can do an average to get the best estimate cost of equity:

= (0.134 + 0.130667) / 2

= 0.1323 or 13.23%

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Angus Corporation paid a dividend of $1.25 per share last year. Dividends are expected to grow...
Angus Corporation paid a dividend of $1.25 per share last year. Dividends are expected to grow at a rate of 5% per year into the foreseeable future. 1) Assume the current Treasury security rate is 4% and the average S&P 500 market return is 8%. ValueLine is reporting a beta of 1.35 for Angus. How much do you think a share of Angus stock is worth? 2) If Angus’ shares are currently selling for $35, what is the expected rate...
ABC Corporation expects to pay a dividend of $2 per share next year, and the dividend...
ABC Corporation expects to pay a dividend of $2 per share next year, and the dividend payout ratio is 80 percent. Dividends are expected to grow at a constant rate of 8 percent forever.Suppose the company's equity beta is 1.21, the market risk premius is 9%, and the risk free rate is 5%. Calculate the present value of growth opportunities.
ABC Corporation expects to pay a dividend of $2 per share next year, and the dividend...
ABC Corporation expects to pay a dividend of $2 per share next year, and the dividend payout ratio is 80 percent. Dividends are expected to grow at a constant rate of 8 percent forever.Suppose the company's equity beta is 1.21, the market risk premius is 9%, and the risk free rate is 5%. Calculate the present value of growth opportunities.
Schnus Corporation just paid a dividend of $5.75 per share, and that dividend is expected to...
Schnus Corporation just paid a dividend of $5.75 per share, and that dividend is expected to grow at 20 percent each year for the next two years, and at constant rate of 8.50% per year thereafter. The company’s beta is 1.50, the required return on the market is 12.50%, and the risk-free rate is 2.40%. Calculate the company’s intrinsic value. thankyou !
Widget Manufacturers Inc. just paid a $3 per share dividend. It is expected that dividends will...
Widget Manufacturers Inc. just paid a $3 per share dividend. It is expected that dividends will grow at 10.00% per year for the next 2 years, at 6.00% the third year and 3.00% every year thereafter. Widget’s’ equity beta is 0.90, while the risk-free rate is 3.20% per year and the market risk premium is 6.00% per year. Based on this information, compute the price per share of Widget stock. Round your answer to the nearest penny. For example, $2,371.243...
Murray Telecom just paid a $3.50 per share stock dividend (D0). Dividends are expected to grow...
Murray Telecom just paid a $3.50 per share stock dividend (D0). Dividends are expected to grow at a rate of 8 percent per year for the next 6 years, 4 percent per year for the subsequent 4 years, and then level off into perpetuity at a growth rate of 2 percent per year. Using the dividend growth model, what should be the value of the firm’s common stock if the required rate of return on similar securities is 11.25 percent?
The Pioneer Corporation currently paid a $3.00 per share dividend on its common stock. Dividends are...
The Pioneer Corporation currently paid a $3.00 per share dividend on its common stock. Dividends are expected to grow forever at 3%, and investors require a 12% rate of return. Pioneer's management is planning to enter new, risky markets to increase its expected dividend growth. However, in response to the increased risk, the investors' required rate of return will increase to 15%. What must be the new value for the dividend growth to justify entering the new, risky markets and...
MasksAreUs Inc. just paid a dividend of $3 per share. Future dividends are expected to grow...
MasksAreUs Inc. just paid a dividend of $3 per share. Future dividends are expected to grow at a constant rate of 5% per year. What is the value of the stock if the required return is 8%?
A company XYZ paid a dividend of Rs.12 per share yesterday and is expected to pay...
A company XYZ paid a dividend of Rs.12 per share yesterday and is expected to pay dividend once per year in the future (at same calendar date as this year) which will grow at a rate 5% to eternity. a) Draw the cash flow diagram. (1) b) If the expected market return is 12%, the risk-free rate is 5%, and the CAPM beta of the company XYZ is 0.8, what is the expected return on equity of the company? (2)...
A Corporation will a dividend of $8.00 per share, and that dividend is expected to grow...
A Corporation will a dividend of $8.00 per share, and that dividend is expected to grow at a constant rate of 5% per year in the future. The company’s beta is 1.50, the market return is 6.50%, and the risk-free rate is 3.50%. What is the company’s current stock price? A. $280.00 B. $96.97 C. $266.67 D. $101.82 Answers D is incorrect. which one is correct and why?
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT