Question
are the below answers to the question correct 3. Calculating Cost of Equity. Stock in CDB Industries has a beta of .90. The market risk
are the below answers to the question correct
3. Calculating Cost of Equity. Stock in CDB Industries has a beta of .90. The market risk premium is 7 percent, and T-bills are currently yielding 3.5 percent. CDB's most recent dividend was $1.80 per share, and dividends are expected to grow at a 5 percent annual rate indefinitely. If the stock sells for $47 per share, what is your best estimate of CDB's cost of equity?
Beta0.9
Market risk premimumrm-rf7%
Risk free raterf3.50%
Most recent dividend per share D01.8$
Dividend Growth rate per annumg5.00%
Current price per share MV (e)47$
Cost of equityKe?
Cost of equity under CAPMKe9.80%
Cost of equity under DGMKe(D1/ P0) + g
Cost of equity under DGMKe9.02%
Average cost of equity under both methods9.41%
Considering the average under both methods, estimated CDB's cost of equity is 9.41%.
5. Calculating Cost of Preferred Stock. Sixth Fourth Bank has an issue of preferred stock with a $6.25 stated dividend that just sold for $108 per share. What is the bank's cost of preferred stock?
Sale price of preferred stock$108
Dividend on preferred stock$6.25
Bank's cost of preferred stock?
Bank's cost of preferred stock5.79%
1. EBIT and Leverage. Kaelea, Inc., has no debt outstanding and a total market value of $125,000. Earnings before interest and taxes, EBIT, are projected to be $10,400 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 35 percent lower. Kaelea is considering a $42,000 debt issue with a 6 percent interest rate. The proceeds will be used to repurchase shares of stock. There are currently 6,250 shares outstanding. Ignore taxes for this problem.
a.Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. Also, calculate the percentage changes in EPS when the economy expands or enters a recession.
Normal ConditionsStrong ExpansionRecession
Earnings before interest and taxes, EBIT ($) 10,400 12,480 6,760
Number of shares outstanding 6,250 6,250 6,250
Earnings per share - EPS ($) 1.6640 1.9968 1.0816
Percentage of change in EPS as compared to normal condition20.00%-35.00%
b. Repeat part (a) assuming that Kaelea goes through with recapitalization. What do you observe? Considering the economy increases as oppose of going into a recession, the leverage would cause the EPS to increase by less of a percentage.
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