Answered step by step
Verified Expert Solution
Question
1 Approved Answer
please answer all 3 questions Quantitative Problem: Barton Industries estimates its cost of common equity by using three approaches: the CApM, the bond-yleld-plus-risk-premium approach, and
please answer all 3 questions
Quantitative Problem: Barton Industries estimates its cost of common equity by using three approaches: the CApM, the bond-yleld-plus-risk-premium approach, and the DCF model. Barton expects next year's annual dividend, D4, to be $2.20 and it expects dividends to grow at a constant rate 9=4.0%. The firm's current common stock price, Po, is $20.00. The current risk-free rate, ras, =4.596; the market risk premium, RPN, =6.2%, and the firm's stock has a current beta, b,=1.20. Assume that the firm's cost of debt, rd, is 14.86%. The firm uses a 3.2% risk premium when arriving at a ballpark estimate of its cost of equity using the bond-yleld-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 entimate of the firm's cost of equity? Cost of equity from new stock =re=P0(1F)D1+g The difference between the flototion-adjusted cost of equity and the cost of equity calculated without the flotation adjustment represents the fotation cost adjustment. Quantitative Problem: Barton industries expects next year's annual dividend, D1, to be 31.80 and it expects dividends to grow at a constant rate g=4,296. The firm's current common stock price, Po, is 525.00. If it needs to issue new common stock, the firm will encounter a 5.996 flotation cost, E. What is the flotation cost adjustment that must be added to its cost of retained earnings? Do not round intermediate calculations. Round your anawer to two decimal places. What is the cost of new common equity considering the estimate made from the three estimation methodologies? Do not round intarmediate calculobian: Round your answer to two decimal places. Quantitative Problem: Barton Industries expects that its target capital structure for raising funds in the future for its capital budget will consist of 40 s debt, 5% preferred stock, and 55% common equity. Note that the firm's marginal tax rate is 25%. Assume that the firm's cost of debt, rd, is 10.0%, the firm's cost of preferred stock, rp, is 9.2% and the firm's cost of equity is 12.6% for old equity, ry and 13.2% for new equity, re. What is the firm's weighted average cost of capital (WACC ) if it uses retained eamings as its source of common equity? Do not round intermediate calculations. Round your answer to twe decimal places. What is the firm's weighted average cost of capital (WACC)) if it has to issue new common stock? Do not round intermediate calculations. Round your antwer to, tho decimal places Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started