The cost of raising capital through retained eamings is the cost of raising capital through issuing new common stock. The cost of equity using the CAPM approach The current risk-free rate of return (rRF) is 4.23 % , while the market risk premium is 6.63 %. the D'Amico Company has a beta of 0.78. Using the Capital Asset Pricing Model (CAPM) approach, D'Amico's cost of equity is The cost of equity using the bond yield plus risk premium approach The Hoover Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company's cost of internal equity. Hoover's bonds yield 11.52%, and the fim's analysts estimate that the firm's risk premium on its stock over its bonds is 3.55 %. Based on the bond-yield-plus-risk-premium approach, Hoover's cost of internal equity is: 18.08% 14.32% 15.07% 18.84% The cost of equity using the discounted cashflow (or dividend growth) approach Kirby Enterprises's stock is currently selling for $32.45 per share, and the fim expects its per-share dividend to be $1.38 in one year. Analysts project the fim's growth rate to be constant at 7.27 %. Using the cost of equity using the discounted cashflow (or dividend growth) approach, what is Kirby's cost of internal equity? 11.52% O 12.10 % Q 14.40 % O 10.94% 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 70.00 of its eamings in the form of cash dividends. It has also historically generated an average return on equity (ROE) of 10.00. Kirby's estimated growth rate is Flash Player IN 32,0,0,255
The cost of raising capital through retained eamings is the cost of raising capital through issuing new common stock. The cost of equity using the CAPM approach The current risk-free rate of return (rRF) is 4.23 % , while the market risk premium is 6.63 %. the D'Amico Company has a beta of 0.78. Using the Capital Asset Pricing Model (CAPM) approach, D'Amico's cost of equity is The cost of equity using the bond yield plus risk premium approach The Hoover Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company's cost of internal equity. Hoover's bonds yield 11.52%, and the fim's analysts estimate that the firm's risk premium on its stock over its bonds is 3.55 %. Based on the bond-yield-plus-risk-premium approach, Hoover's cost of internal equity is: 18.08% 14.32% 15.07% 18.84% The cost of equity using the discounted cashflow (or dividend growth) approach Kirby Enterprises's stock is currently selling for $32.45 per share, and the fim expects its per-share dividend to be $1.38 in one year. Analysts project the fim's growth rate to be constant at 7.27 %. Using the cost of equity using the discounted cashflow (or dividend growth) approach, what is Kirby's cost of internal equity? 11.52% O 12.10 % Q 14.40 % O 10.94% 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 70.00 of its eamings in the form of cash dividends. It has also historically generated an average return on equity (ROE) of 10.00. Kirby's estimated growth rate is Flash Player IN 32,0,0,255
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
Problem 1PS
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Transcribed Image Text:The cost of raising capital through retained eamings is
the cost of raising capital through issuing
new common stock.
The cost of equity using the CAPM approach
The current risk-free rate of return (rRF) is 4.23 % , while the market risk premium is 6.63 %. the D'Amico Company
has a beta of 0.78. Using the Capital Asset Pricing Model (CAPM) approach, D'Amico's cost of equity is
The cost of equity using the bond yield plus risk premium approach
The Hoover Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM
method for estimating a company's cost of internal equity. Hoover's bonds yield 11.52%, and the fim's analysts
estimate that the firm's risk premium on its stock over its bonds is 3.55 %. Based on the
bond-yield-plus-risk-premium approach, Hoover's cost of internal equity is:
18.08%
14.32%
15.07%
18.84%
The cost of equity using the discounted cashflow (or dividend growth) approach
Kirby Enterprises's stock is currently selling for $32.45 per share, and the fim expects its per-share dividend to be
$1.38 in one year. Analysts project the fim's growth rate to be constant at 7.27 %. Using the cost of equity using the
discounted cashflow (or dividend growth) approach, what is Kirby's cost of internal equity?
11.52%
O 12.10 %
Q 14.40 %
O 10.94%
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 70.00 of its eamings in the form of cash dividends. It has also historically
generated an average return on equity (ROE) of 10.00. Kirby's estimated growth rate is
Flash Player IN 32,0,0,255
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