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
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**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%
Transcribed Image Text:**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%
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