Question

The market risk premium estimates vary quite a bit, depending on your source. What source would you use if you had to determine the cost of your equity-financed firm and were considering an investment of $500 million? |

Answer #1

What source would you use if you had to determine the cost of
your equity-financed firm and were considering an investment of
$500 million?

#1 The risk-free rate
is 1.48% and the market risk premium is 7.25%. A stock with a β of
0.87 just paid a dividend of $1.18. The dividend is expected to
grow at 21.01% for three years and then grow at 3.99% forever. What
is the value of the stock?
#2 The risk-free rate
is 3.17% and the market risk premium is 5.19%. A stock with a β of
1.10 just paid a dividend of $1.07. The dividend is expected...

Tri Co. has the following cost of debt structure: The market
risk premium is 4.5%, the risk free rate is 5%, beta of unleveraged
firm is 1.20, Hamada’s equation b= bU [1 + (1 -
T)(wd/we)]. T=40%.
Please use the above information to answer following
questions:
wd
0%
20%
30%
40%
50%
rd
0.0%
9.0%
10.0%
11.0%
12.0%
If the firm uses 50% debt, what is the cost of equity of the
firm, based on CAPM model?
Cost of Equity...

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...

If Inc. were an all-equity firm, it would have a beta of 1.2.
The market risk premium is 10 percent, and the return on government
bond is 2 percent.
The company has a debt-equity ratio of 0.65, which, according to
the CFO, is optimal. Soroc Inc. is considering a project that
requires the initial investment of $28 million. The CFO of the firm
has evaluated the project and determined that the project’s free
cash flows will be $3.3 million per...

1. Common shares of Leon's Furniture Limited have a beta of
0.465
The market risk premium is 9 percent, and T-bills are currently
yielding 1.63 percent.
The firm paid dividends totalling $0.56 in the past 12 months
($0.14 quarterly), and dividends are expected to grow at a 2
percent annual rate indefinitely.
If the stock trades for $14.90 per share, what is your best
estimate of the firm's cost of equity?
2. Assuming Leon's Furniture Limited also has an issue...

You are a US investor considering investing in Swizerland.
The world market risk premium is estimated at 5%, the Swiss
franc
offers a 1% risk premium, and the current risk-free rates
are equal to 4% in dollars and 3% in francs. In other words, you
expect
the
Swiss franc to appreciate against the dollar by an amount equal to
the interest rate differential plus the currency risk
premium, or a total of 2%. You believe that the following
equilibrium model...

1. The risk-free rate is 2.3% and the market risk premium is
5.5%. A stock has a beta of 1.3, what is its expected return of the
stock? (Enter your answers as a percentage. For example, enter
8.43% instead of 0.0843.)
2. Calculate the expected return on a stock with a beta of 1.59.
The risk-free rate of return is 4% and the market portfolio has an
expected return of 10%. (Enter your answer as a percentage. For
example, enter...

Newcastle Inc. currently has no debt, annual earnings before
interest and taxes of $76 million and an average tax rate of 34%.
Net income is expected to stay constant forever. The firm pays out
100% of net income as dividends.
Using the CAPM, the firm estimates that its cost of equity is
13%. The risk-free rate is 2% and the expected equity market risk
premium is 7%. There are 8 million shares outstanding.
The firm is considering issuing bonds worth...

If Soroc Inc. were an all-equity firm, it would have a beta of
1.5. The market risk premium is 10 percent, and the return on
government bond is 2 percent.
The company has a debt-equity ratio of 0.65, which, according to
the CFO, is optimal. Soroc Inc. is considering a project that
requires the initial investment of $28 million. The CFO of the firm
has evaluated the project and determined that the project’s free
cash flows will be $3.3 million...

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