Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The current risk-free rate of return (rRFrRF) is 4.67% while the market risk premium is 5.75%. The Roosevelt Company has a beta of 0.78. Using

The current risk-free rate of return (rRFrRF) is 4.67% while the market risk premium is 5.75%. The Roosevelt Company has a beta of 0.78. Using the capital asset pricing model (CAPM) approach, Roosevelts cost of equity is .

The cost of equity using the bond yield plus risk premium approach

The Taylor Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a companys cost of internal equity. Taylors bonds yield 11.52%, and the firms analysts estimate that the firms risk premium on its stock over its bonds is 3.55%. Based on the bond-yield-plus-risk-premium approach, Taylors cost of internal equity is:

15.07%

14.32%

18.84%

18.08%

The cost of equity using the discounted cash flow (or dividend growth) approach

Kirby Enterprisess stock is currently selling for $32.45 per share, and the firm expects its per-share dividend to be $1.38 in one year. Analysts project the firms growth rate to be constant at 5.72%. Estimating the cost of equity using the discounted cash flow (or dividend growth) approach, what is Kirbys cost of internal equity?

9.97%

13.46%

12.46%

9.47%

Estimating growth rates

It is often difficult to estimate the expected future dividend growth rate for use in estimating the cost of existing equity using the DCF or DG approach. In general, there are three available methods to generate such an estimate:

Carry forward a historical realized growth rate, and apply it to the future.
Locate and apply an expected future growth rate prepared and published by security analysts.
Use the retention growth model.

Suppose Kirby is currently distributing 65% of its earnings in the form of cash dividends. It has also historically generated an average return on equity (ROE) of 24%. Kirbys estimated growth rate is %.

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

Sport Finance

Authors: Gil Fried, Timothy D. DeSchriver, Michael Mondello

3rd Edition

1450421040, 978-1450421041

More Books

Students also viewed these Finance questions