The DCF approach for estimated the cost of retained earnings, rs, is given as follows:
s = D1/P0 + Expected gL
Investors expect to receive a dividend yield, , plus a capital gain, g, for a total expected return. In -Select- 8 , this expected return is also equal to the required return. It's easy to calculate the dividend yield; but because stock prices fluctuate, the yield varies from day to day, which leads to fluctuations in the DCF cost of equity. Also, it is difficult to determine the proper growth especially if past growth rates are not expected to continue in the future. However, we can use growth rates as projected by security analysts, who regularly forecast growth rates of earnings and dividends.
Which method should be used to estimate rs? If management has confidence in one method, it would probably use that method's estimate. Otherwise, it might use some weighted average of the three methods. Judgment is important and comes into play here, as is true for most decisions in finance.
Quantitative Problem: Barton Industries estimates its cost of common equity by using three approaches: the CAPM, the bond-yield-plus-risk-premium approach, and the DCF model. Barton expects next year's annual dividend, D1, to be $1.50 and it expects dividends to grow at a constant rate g = 5.2%. The firm's current common stock price, P0, is $20.00. The current risk-free rate, rRF, = 4.3%; the market risk premium, RPM, = 5.6%, and the firm's stock has a current beta, b, = 1.15. Assume that the firm's cost of debt, rd, is 12.06%. The firm uses a 2.6% risk premium when arriving at a ballpark estimate of its cost of equity using the bond-yield-plus-risk-premium approach. What is the firm's cost of equity using each of these three approaches? Round your answers to two decimal places.
CAPM cost of equity:%
Bond yield plus risk premium:%
DCF cost of equity:%
What is your best estimate of the firm's cost of equity?
Answers: 1
Business, 21.06.2019 15:50, michellelirett
Aceramics manufacturer sold cups last year for $7.50 each. variable costs of manufacturing were $2.25 per unit. the company needed to sell 20,000 cups to break even. net income was $5,040. this year, the company expects the price per cup to be $9.00; variable manufacturing costs to increase 33.3%; and fixed costs to increase 10%. how many cups (rounded) does the company need to sell this year to break even?
Answers: 2
Business, 22.06.2019 01:00, samymaria1344
Suppose that hubert, an economist from an am talk radio program, and kate, an economist from a nonprofit organization on the west coast, are arguing over government bailouts. the following dialogue shows an excerpt from their debate: kate: to recent financial crises, the concept of bailouts is a hot topic for debate among everyone these days. hubert: indeed, it’s gotten crazy! a government bailout of severely distressed financial firms is unnecessary because free markets will properly price assets. kate: i don’t know about that. without a bailout of severely distressed financial firms, the economy will experience a deep recession. the disagreement between these economists is most likely due todifferences in scientific judgments . despite their differences, with which proposition are two economists chosen at random most likely to agree? business managers can raise profit more easily by reducing costs than by raising revenue. central banks should focus more on maintaining low unemployment than on maintaining low inflation. employers should not be restricted from outsourcing work to foreign nations
Answers: 3
Business, 22.06.2019 18:00, mcckenziee
When peter metcalf describes black diamond’s manufacturing facility in china as a “greenfield project,” he means that partnered with a chinese company to buy the plant . of all market entry strategies, this one carries the lowest risk. because black diamond manufactures its outdoor sports products outside the united states, what risks must its managers be aware of?
Answers: 1
The DCF approach for estimated the cost of retained earnings, rs, is given as follows:
s = D1/P0 +...
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