Please step by step solutions Longing Toys Inc. has just paid an annual dividend of $0.52 per share. Analysts expect the firm'sdividends to grow by 7% forever. Its stock price is $38.6 and its beta is 1.2. The risk-free rate is 3% and theexpected return on the market portfolio is 10%. Its bonds have a yield to maturity of 4%, and the risk-premium of Longing's stock over its bonds is 5%. What is the cost of equity according to the constantgrowth model? What is the cost of equity according to the CAPM? What is the cost of equity according tothe bond yield plus risk premium approach? What is your best guess for the cost of equity, using themidpoint of the range?

3. Cost of Equity (Bond Yield Plus Risk Premium)Formula: Cost of Equity (BYRP) = Yb + RpCalculation:…

Answered: Longing Toys Inc. has just paid an…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 19P

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The future earnings, dividends, and common stock price of Callahan Technologies Inc. are expected to grow 3% per year. Callahan's common stock currently sells for $22.75 per share; its last dividend was $2.00; and it will pay a $2.06 dividend at the end of the current year. If the firm's bonds earn a return of 9%, based on the bond-yield-plus-risk-premium approach, what will be rs? Use the midpoint of the risk premium range discussed in Section 10-5 in your calculations. Round your answer to two decimal places. % If you have equal confidence in the inputs used for the three approaches, what is your estimate of Callahan's cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places. %
What is the average return in the market (Rm)?
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The total market value of the equity of Okefenokee Condos is $3 million, and the total value of its debt is $2 million. The treasurer estimates that the beta of the stock currently is 1.1 and that the expected risk premium on the market is 10%. The Treasury bill rate is 5%, and investors believe that Okefenokee's debt is essentially free of default risk. What is the required rate of return on Okefenokee stock? (Do not round intermediate calculations. Enter your answer as a whole percent.) Estimate the WACC assuming a tax rate of 21%.(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Estimate the discount rate for an expansion of the company’s present business. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Suppose the company wants to diversify into the manufacture of rose-colored glasses. The beta of optical manufacturers with no debt outstanding is 1.3. What is the required…
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