The most popular method that firms use to calculate the cost of equity is ________. Group of answer choices flotation cost model CAPM coefficient of variation dividend discount model bond yield plus risk premium

The most popular method that firms use to calculate the cost of equity is ________. Group of answer choices flotation cost model CAPM coefficient of variation dividend discount model bond yield plus risk premium

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter8: Basic Stock Valuation

Section: Chapter Questions

Problem 4Q: Explain how to use the free cash flow valuation model to find the price per share of common equity.

See similar textbooks

Related questions

Q: You have learnt three approaches that can be used in determining the discount rate in equity…

A: Equity valuation refers to the method of estimating the fair value of the firm’s stock It shows…

Q: Which of the following does NOT directly affect a company's cost of equity? Select one: a. Return…

A: The capital asset pricing model (CAPM) describes the relationship between the expected return and…

Q: A class of Efficient Market Hypothesis that implies all public information is calculated into a…

A: Efficient Market Hypothesis is the market theory which depicts that market is generally efficient…

Q: Define the terms covariance and correlationcoefficient. How are they related to one another,and how…

A: Covariance refers to the situation which tells about the association between two variables how they…

Q: How can I calculate CF or (dividends + buyback) in Implied equity risk premium? (By example of…

A: Implied ERP is calculated by first calculating the Return on Equity using constant dividend growth…

Q: A stock’s beta is a key input to hedging in the equity market. A bond’s duration is key in…

A: The volatility of the stock relative to the changes in the market is measured by beta. Suppose the…

Q: The cost of equity using the bond yield plus risk premium approach The Harrison Company is closely…

A: The Bond plus risk premium approach refers to the approach which is mainly used by the companies…

Q: According to the Capital Asset Pricing Model (CAPM), fairly-priced securities have

A: It is an equation derived from the security market line that attempts to explain the relationship…

Q: A firm is considering three different financing alternatives: debt, preferred stock, and common…

A: EBIT-EPS analysis in leverage EBIT-EPS analysis provides a scientific basis for making comparisons…

Q: n the formula ke >= (D1/P0) + g, what does (D1/P0) represent? Select one: a. The expected…

A: ke = Required return D1=Expected dividend P0=Current price g = Growth rate

Q: Describe each of the following methods for estimating the cost of equity: (a) the CAPM, (b) DCF,and…

A: a) CAPM The full form of CAPM is the Capital asset pricing model. It is used in determining the…

Q: When trying to estimate the cost of equity for a firm using the CAPM, it is possible to find the…

A: The capital asset pricing model (CAPM) is one of the methods used to compute the cost of equity…

Q: . Which of the following statements regarding available-for-sale equity investments is true? a.…

A: As the name suggests the available-for-sale equity or securities are the equities that are held to…

Q: What is the estimated cost of equity using thedividend growth approach?

A: Introduction: Dividend growth model is an approach which assumes dividends are that at a constant…

Q: 1. Which of the following ratios would analysts use to value stocks? Select one: a. Price per…

A: The price earning ratio is considered as the relationship between stock price and earnings per…

Q: What are flotation costs?

A: Standard Disclaimers“Since you have asked multiple question, we will solve the first question for…

Q: Describe two different ways one can short equity market volatility

A: An equity market Volatility is the rate at which the price of a stock increases or decreases over a…

Q: The capital asset pricing model expresses the cost of equity as a function of a return on riskless…

A: The term capital structure refers to the structure of debt and equity financing in the company. A…

Q: MM Proposition II states that: I) the expected return on equity is positively related to leverage;…

A: MM has given two basic proposition one is related to value of firm and second is about the cost of…

Q: w much is the cost of equity using the capital asset pricing model? b. How much is the cost of…

A: In this we have to determine the cost of equity using capital asset pricing model.

Q: The dividend discount model is used by most equity analysts to determine a stock’s intrinsic value.…

A: The Dividend discount model: First propounded by Myron. J. Gordon and Eli Shapiro in 1956, the…

Q: Use the following data for the Sara Company to calculate the cost of common stocks (Rs), the cost of…

A: given, Rf=7% Rm=25% beta=1.5 according to CAPM model: Rs=rf+beta×rm-rf=7%+1.5×25%-7%=34% answer: The…

Q: Explain the difference between expected rate of return, required rate of return, and historical rate…

A: Return Return is also referred to as the money lost or made over a specific period of time. It can…

Q: (WACC) and leverage

A: Cost of capital refers to the tool which is helpful in analyzing the cost of the capital projects…

Q: The two main approaches of equity analysis are: a. The discounted cash flow models and the absolute…

A: Equity analysis is carried out to value a firm. The two main approaches to value equity are given…

Q: The appropriate benchmark for the return on equity is: A)the weighted average cost of capital.…

A: Total earning of the firm that is held in the hands of shareholders of the company.

Q: To identify the cost of equity, which models are better: The dividend growth model or CAPM-derived…

A: The question is based on the comparative study of the methods to derive cost of equity. Cost of…

Q: To estimate the required rate of return on a stock we can use the Capital Asset Pricing Model (CAPM)…

A: The required rate of return on a stock can be defined as a rate of return which an investor would…

Q: The Capital Asset Pricing Model (CAPM) says that the risk premium on a stock is equal to its beta…

A: Capital asset pricing model is a formula that projects the relationship between systematic risk and…

Q: Use the following data for the Sara Company to calculate the cost of common stocks (Rs), the cost of…

A: The cost of Preferred stocks = (Dividend + Floatation cost) / Price of Preferred stock The cost of…

Q: What are the advantages and disadvantages of the above 7 proxies

A: Share market can give higher return from the banks but it also consist risk, if investor diversify…

Q: Briefly explain why bonds of different maturities have different yields in terms of the expectations…

A: According to expectations theory, the average of short-term rates to prevail is equal to long term…

Q: The curvature of the bond price yield curve has been explained to be caused by three basic theories…

A: The curvature of the convexity is the relationship between the bond price and the yield to maturity.…

Q: The beta risk of a share reflects the sensitivity of cash flow, earnings, and the share price to…

A: The beta of a stock or portfolio tells us how sensitive our holdings are to systematic risk.…

Q: Apart from using PE ratio, what is another way of valuing the stock price? if we have the EPS, Share…

A: Price earning ratio is used to value a company's share price. It is calculated by dividing the…

Q: You propose managing a portfolio of fixed income securities by utilising a passive strategy. Which…

A: Answer: The correct answer is Option(C).

Q: Explain why bonds of different maturities have different yields in terms of expectations hypotheses.…

A: A yield curve plots interest rates of U.S. Treasury securities as on a particular date based on…

Q: ly based on tax rate structure may be less than optimal.

A: Equity: This is one of the tax system evaluationcriteria pertaining to the concept of equal or…

Q: Apart from using PE ratio, what is another way of valuing the stock price? if we have the EPS, Share…

A: PE ratio stands for price to earning ratio, which is a part of financial ratio that is used to…

Q: Calculate the expected return for each stock assuming the Capital Asset Pricing Model (CAPM) is…

A: Risk free rate = 5% Expected return on market = 11% Beta of stock A = 0.7 Beta of stock B = 1.4

Q: Consider the following scenario and complete the last column and then Assess the sensitivity of the…

A: P/E ratio: It shows the market value of company’s share with respect to the company’s earnings.

Q: The "market RISK premium" a) Is the additional market return over the risk-free rate required to…

A: market risk premium: it is the difference between expected return of market and risk free rate.

Q: The CAPM is one of the most commonly used ways to determine the Select one: O a. Cost of preferred…

A: CAPM means capital assets pricing mode. Cost of equity means cost of raising the money from common…

Question

The most popular method that firms use to calculate the cost of equity is ________.

Group of answer choices

flotation cost model

CAPM

coefficient of variation

dividend discount model

bond yield plus risk premium

Definition Definition Amount of return a company generally pays to its equity investors. The cost of equity represents the compensation required by the market in lieu of owning the asset firm and simultaneously bearing the risk of ownership.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step by step

Solved in 2 steps with 1 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Question: To estimate the cost of equity we can use the Capital Asset Pricing Model (CAPM) or the Discount Growth Model (DGM). How we can decide which model to use? Explain.
The required rate of return on equity is the most appropriate discount rate to use when applying a ______ valuation model. A. FCFE B. DDM C. FCEF or DDM D. P/E E. FCEF
"We can estimate cost of equity using Capital Asset Pricing Model (CAPM)" True False
The slope of the Security Market Line equals to ____, and the slope of Capital Allocation Line equals to____. Select one: A. Beta; Sharpe Ratio B. Market Risk Premium; Sharpe Ratio C. Risk free rate; Volatility D. Market Risk Premium; Volatility
Which are valid methods for finding the cost of equity? Check all that apply: 1. The dividend discount model approach 2. The perpetuity approach 3. The YTM approach 4. The CAPM or SML approach
Profitaility Index Please solve for the profitiability index and explain. The information is attached.
Which one of the following is most closely related to the net present value profile? A: Payback B: Discounted payback C: Profitability index D: Average accounting return E: Internal rate of return
Using the capital asset pricing model (CAPM) determine the Required Rate of Return (RRR) for each stock and state whether it is undervalued or overvalued.
Calculate the following profitablity leverage management ratios a. Gross profit margin b. Net profit margin c. Return on investment d. Return on Stockholders' equity Calculate the following market-based ratios: a. Price-to-earnings ratio b. Market price-to-book value ratio
Which of the following is NOT a profitability ratio? Select one:a. Return on Equityb. Net Profit Marginc. Return on Assetsd. Average Collection Period
The capital asset pricing model expresses the cost of equity as a function of a return on riskless assets, a market premium, and: Select one:a. Unsystematic risk.b. None of these.c. The cost of debt.d. Systematic risk.
Which of the following is needed to calculate a firm’s WACC? A. the cost of carrying inventory B. the amount of capital necessary to make the investment C. the cost of preferred stock D. the probability distribution of expected returns E. both b and c