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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
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 $2.30 and it expects dividends to grow at a constant rate g = 5.8%. The firm's current common stock price, Po, is $25.00. The current risk-free rate, rRF, = : 4.8%; the market risk premium, RPM, = 6.4%, and the firm's stock has a current beta, b, = 1.35. Assume that the firm's cost of debt, rd, is 13.16%. The firm uses a 3.4% 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? The best estimate is the average of the three approaches
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