Question
Ron Industries estimates its cost of common equity by using three approaches: the CAPM, the bond-yield-plus-risk-premium approach, and the DCF model. Ron expects next year's
Ron Industries estimates its cost of common equity by using three approaches: the CAPM, the bond-yield-plus-risk-premium approach, and the DCF model. Ron expects next year's annual dividend, D1, to be $2.30 and it expects dividends to grow at a constant rate g = 4.2%. The firm's current common stock price, P0, is $27.00. The current risk-free rate, rRF, = 4%; the market risk premium, RPM, = 5.3%, and the firm's stock has a current beta, b, = 1.2. Assume that the firm's cost of debt, rd, is 8.24%. The firm uses a 3.3% 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 2 decimal places.
CAPM cost of equity: | Blank 1% |
Bond yield plus risk premium: | Blank 2% |
DCF cost of equity: | Blank 3% |
What is your best estimate of the firm's cost of equity? Blank 4%. Round your answers to 2 decimal places.
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