**Cost of Equity Calculation Methods****Capital Asset Pricing Model (CAPM) Approach:**1. The current risk-free rate of return (rRF) is 4.23%.2. The market risk premium is 6.63%.3. The Monroe Company has a beta of 0.78.Using the CAPM approach, Monroe’s cost of equity is calculated as follows:Options available:- 11.28%- 9.40%- 8.46%- 9.87%**Bond Yield Plus Risk Premium Approach:**The Hoover Company is closely held and lacks inputs for the CAPM method. The firm's details are:- Hoover’s bonds yield: 10.28%- Firm’s risk premium on stock over bonds: 3.55%Using the bond-yield-plus-risk-premium method, Hoover's internal equity cost is estimated as:Options available:- 17.29%- 13.14%- 13.83%- 15.21%**Discounted Cash Flow (or Dividend Growth) Approach:**Grant Enterprises details:- Current stock price: $32.45 per share- Expected per-share dividend in one year: $1.38- Projected growth rate: 7.27%Using the discounted cash flow approach, Grant’s internal equity cost is estimated as:Options available:- 15.55%- 11.52%- 12.10%- 10.94%

Capital Asset Pricing Model(CAPM) is used to determine the market behaviour. The model works on the principle that the systematic risk is linked with the security is equal for every kind of security in the portfolio. The risk of portfolio is lowered by increasing the number of stocks which decreases the unsystematic risk distribution by the number of stocks in the portfolio. It depicts the theoretical relationship between the required return and systematic risk which considers the regular empirical research and testing. The equation used in CAPM is shown as under,Part A. Calculation of the cost of equity by using the CAPM: Cost of equity(CAPM)=Riskfree rate+Beta×Market risk premium=4.23%+0.78×6.63%=4.23%+5.1714%=9.40% So, the cost of equity by using the capital asset pricing model is 9.40% and hence, the correct answer is Option B. Part B. Calculation of the cost of equity by using the bond yield and risk premium: Cost of equity=Bond Yield+Risk premium=10.28%+3.55%=13.83% So, the cost of equity by using the bond yield and risk premium is 13.83% and hence, the correct answer is Option C. Part C. Calculation of the cost of equity by using the dividend growth approach: Cost of equityDividend growth=Expected dividend next yearCurrent stock price×100+growth rate=$1.38$32.45×100+7.27%=0.04252696456×100+7.27%=4.25%+7.27%=11.52% So, the cost of equity by using the dividend growth model is 11.52% and hence, the correct answer is Option B.

Business

Finance

The current risk-free rate of return (TRF) is 4.23% while the market risk premium is 6.63%. The Monroe Company has a beta of 0.78. Using the capital asset pricing model (CAPM) approach, Monroe's cost of equity is The cost of equity using the bond yield plus risk premium 17.29% The Hoover Company is closely held and, therefore, cannot gener cost of internal equity. Hoover's bonds yield 10.28%, and the firm 3.55%. Based on the bond-yield-plus-risk-premium approach, Ho 9.87% O 13.14% 13.83% O 15.21% O 15.55% 11.28% 11.52% 9.40% The cost of equity using the discounted cash flow (or dividend growth) approach 12.10% Grant Enterprises's 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 firm's growth rate to be constant at 7.27%. Estimating the cost of equity using the discounted cash flow (or dividend growth) approach, what is Grant's cost of internal equity? 10.94% 8.46% inputs with which to use the CAPM method for estimating a company's estimate that the firm's risk premium on its stock over its bonds is of internal equity is:

The current risk-free rate of return (TRF) is 4.23% while the market risk premium is 6.63%. The Monroe Company has a beta of 0.78. Using the capital asset pricing model (CAPM) approach, Monroe's cost of equity is The cost of equity using the bond yield plus risk premium 17.29% The Hoover Company is closely held and, therefore, cannot gener cost of internal equity. Hoover's bonds yield 10.28%, and the firm 3.55%. Based on the bond-yield-plus-risk-premium approach, Ho 9.87% O 13.14% 13.83% O 15.21% O 15.55% 11.28% 11.52% 9.40% The cost of equity using the discounted cash flow (or dividend growth) approach 12.10% Grant Enterprises's 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 firm's growth rate to be constant at 7.27%. Estimating the cost of equity using the discounted cash flow (or dividend growth) approach, what is Grant's cost of internal equity? 10.94% 8.46% inputs with which to use the CAPM method for estimating a company's estimate that the firm's risk premium on its stock over its bonds is of internal equity is:

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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