Question

Which of the following statements about cost-of-equity
estimation is **most correct**?

A | The CAPM approach is always superior to the DCF approach. |

B | The risk premium used in the debt-cost-plus-risk-premium approach is the same as the risk premium used in the CAPM approach. |

C | Because the CAPM and DCF approaches use market data, they provide precise cost-of-equity estimates. |

D | The debt-cost-plus-risk-premium approach can be used when the business does not have publicly traded equity. |

E | All approaches always produce estimates that fall within a narrow range. |

Answer #1

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
$2.20 and it expects dividends to grow at a constant rate g = 3.6%.
The firm's current common stock price, P0, is $22.00.
The current risk-free rate, rRF, = 4.8%; the market risk
premium, RPM, = 6.1%, and the firm's stock has a current
beta, b, = 1.2....

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 $1.90 and it expects dividends to
grow at a constant rate g = 5.2%. The firm's current common stock
price, P0, is $25.00. The current risk-free rate,
rRF, = 4.5%; the market risk premium, RPM, =
6.2%, and the firm's stock has a current beta, b, = 1.35. Assume
that...

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
$1.80 and it expects dividends to grow at a constant rate g = 5.9%.
The firm's current common stock price, P0, is $30.00.
The current risk-free rate, rRF, = 5%; the market risk
premium, RPM, = 6.3%, and the firm's stock has a current
beta, b, = 1.1....

The cost of equity using the CAPM approach
1) The current risk-free rate of return (rRFrRF) is 4.67% while
the market risk premium is 5.75%. The Jefferson Company has a beta
of 0.92. Using the capital asset pricing model (CAPM) approach,
Jefferson’s cost of equity is __________ .
The cost of equity using the bond yield plus risk premium
approach
2) The Jackson Company is closely held and, therefore, cannot
generate reliable inputs with which to use the CAPM method...

Big Time Corp. is trying to determine their cost of equity. You
would like to use 3 different approaches. Given the following
information, calculate the cost of equity according to the CAPM
approach , Bond Yield plus Risk Premium approach, and the
Discounted Cashflow approach:
• Current risk-free return is 3.86%
• Market risk premium is 5.75%
• Beta is 0.92
• Bond yield is 10.28%
• The firm's analysts estimate that the firm's risk premium on
its stock over...

10-6 COST OF COMMON EQUITY The future earnings, dividends, and
common stock price of Callahan Technologies Inc. are expected to
grow 6% per year. Callahan's common stock currently sells for
$22.00 per share; its last dividend was $2.00; and it will pay a
$2.12 dividend at the end of the current year.
a. Using the DCF approach, what is its cost of common
equity?
b. If the firm's beta is 1.2, the risk-free rate is 6%, and the
average return...

Cost of Common Equity
The future earnings, dividends, and common stock price of
Carpetto Technologies Inc. are expected to grow 4% per year.
Carpetto's common stock currently sells for $25.50 per share; its
last dividend was $2.00; and it will pay a $2.08 dividend at the
end of the current year.
Using the DCF approach, what is its cost of common equity?
Round your answer to two decimal places.
%
If the firm's beta is 1.30, the risk-free rate is...

Which of the following statements about the cost of equity to
not-for-profit businesses is most correct?
A
Because such businesses have no shareholders, the cost of
equity is zero.
B
The cost of equity is the return available on short-term
investments (marketable securities).
C
The cost of equity is the greater of the return required to
support asset growth or to maintain the desired bond (debt)
rating.
D
A cost-of-equity estimate is not needed, because not-for-profit
businesses are not required...

COST OF COMMON EQUITY
The future earnings, dividends, and common stock price of
Callahan Technologies Inc. are expected to grow 6% per year.
Callahan's common stock currently sells for $23.00 per share; its
last dividend was $1.50; and it will pay a $1.59 dividend at the
end of the current year.
Using the DCF approach, what is its cost of common equity? Round
your answer to two decimal places. Do not round your intermediate
calculations.
________%
If the firm's beta...

COST OF COMMON EQUITY
The future earnings, dividends, and common stock price of
Callahan Technologies Inc. are expected to grow 5% per year.
Callahan's common stock currently sells for $27.25 per share; its
last dividend was $1.60; and it will pay a $1.68 dividend at the
end of the current year.
Using the DCF approach, what is its cost of common equity?
Round your answer to two decimal places. Do not round your
intermediate calculations.
%
If the firm's beta...

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