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Assignment - The Cost of Capital a firm cannot invest retained eamings to earn a rate of return the required rate of return on retained
Assignment - The Cost of Capital a firm cannot invest retained eamings to earn a rate of return the required rate of return on retained earnings, it hould return those funds to its stockholders. The cost of equity using the CAPM approach The current risk-free rate of return (t tep) is 4.23% while the market risk premium is 5.75%. The Allen Company has a beta of 0.78 . Using the capital asset pricing model (CApM) approach, Allen's cost of equity is The cost of equity using the bond yield plus risk premium approach The Hoover Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company's cout of internal equity. Hocver's bonds yield 10.2846, and the firm's analysts extmate that the firm's risk premium on its stock over its bonds is 3.55\%. Based on the bond-yield-plus-risk-premium approach, Hoover's cost of internal equity is: 15.21%16.60%13.83%13.14% The cost of equity using the discounted cash fow (or dividend growth) approach Kirby Emerprises's tock is currently selling for 325.67 per share, and the firm expects its per-share dividend to be $2:35 in ane yeat. Analysts project the firm's gromth rate to be constant at 5,72\%. Using the cost of equiry using the discounted cosh flow (or dividend groweh) opprosch, what is kirbys cost of internal equity? 14.134 18.59% 14.87%W 15.61% Estimating growth rates It is ohen dificulto estimate the expeched future dividend growth rate for use in estimating the cost of existing equity using the DCF-or DG apgrosch. in general, there are three available methods to generate such an estimate: - Carry forward a fistorical feslived oieth mate, and apply it to the future. - Locate and apoly an expected future growthrate prvomed and published by securisy andlyits. - Wie the reteivion growth model Suppose Kroy is furenty distribuhing 75% of its earnings in the form of canh dividends: It hat aiso Nistoncaliy generated an average refurh on equity (K.OE) of Bw, kirby's estimated gromth rate is
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