Question

**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, D_{1}, to be
$2.20 and it expects dividends to grow at a constant rate g = 3.6%.
The firm's current common stock price, P_{0}, is $22.00.
The current risk-free rate, r_{RF}, = 4.8%; the market risk
premium, RP_{M}, = 6.1%, and the firm's stock has a current
beta, b, = 1.2. Assume that the firm's cost of debt, r_{d},
is 8.76%. The firm uses a 4.1% risk premium when arriving at a
ballpark estimate of its cost of equity using the
bond-yield-plus-risk-premium approach. What is the firm's cost of
equity using each of these three approaches? Round your answers to
2 decimal places.

CAPM cost of equity: | % |

Bond yield plus risk premium: | % |

DCF cost of equity: |

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
$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....

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...

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
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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 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...

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...

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 $28.25 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 8% per year.
Callahan's common stock currently sells for $25.00 per share; its
last dividend was $2.00; and it will pay a $2.16 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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