Kirby Enterprises's stock is currently selling for $32.45 per share, and the firm expects its per-share dividend to be $2.35 in one year. Analysts project he firm's growth rate to be constant at 5.72%. Estimating the cost of equity using the discounted cash flow (or dividend growth) approach, what is irby's cost of internal equity? 12.31% 17.50% 13.61% 12.96% stimating growth rates
Kirby Enterprises's stock is currently selling for $32.45 per share, and the firm expects its per-share dividend to be $2.35 in one year. Analysts project he firm's growth rate to be constant at 5.72%. Estimating the cost of equity using the discounted cash flow (or dividend growth) approach, what is irby's cost of internal equity? 12.31% 17.50% 13.61% 12.96% stimating growth rates
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:The cost of equity using the discounted cash flow (or dividend growth) approach
Kirby Enterprises's stock is currently selling for $32.45 per share, and the firm expects its per-share dividend to be $2.35 in one year. Analysts project
the firm's growth rate to be constant at 5.72%. Estimating the cost of equity using the discounted cash flow (or dividend growth) approach, what is
Kirby's cost of internal equity?
O 12.31%
O 17.50%
O 13.61%
O 12.96%
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 50% of its earnings in the form of cash dividends. It has also historically generated an average return on equity
(ROE) of 8%. Kirby's estimated growth rate is
▼ %.
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