Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

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 $1.70 and it expects dividends to grow at a constant rate g = 4.6%. The firm's current common stock price, P0, is $25.00. The current risk-free rate, rRF, = 4.4%; the market risk premium, RPM, = 5.9%, and the firm's stock has a current beta, b, = 1.30. Assume that the firm's cost of debt, rd, is 7.83%. The firm uses a 2.9% 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 two decimal places. CAPM cost of equity: % Bond yield plus risk premium: % DCF cost of equity: % What is your best estimate of the firm's cost of equity?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Corporate Financial Management

Authors: Douglas R. Emery, John D. Finnerty, John D. Stowe

4th Edition

1935938002, 9781935938002

More Books

Students also viewed these Finance questions

Question

What is the name and web address of the blog?

Answered: 1 week ago