1 = $1.00 P0 = $25.00 g = 6% firm’s bond yield = 6.5% a) What is this firm’s cost of equity using the DCF? b) What is this firm’s cost of equity using the bond-yield-plus-risk-premium approach? Use the midrange of the judgmental risk premium for the bond-yield-plus-risk-premium approach.

1 = $1.00 P0 = $25.00 g = 6% firm’s bond yield = 6.5% a) What is this firm’s cost of equity using the DCF? b) What is this firm’s cost of equity using the bond-yield-plus-risk-premium approach? Use the midrange of the judgmental risk premium for the bond-yield-plus-risk-premium approach.

Economics:

10th Edition

ISBN:9781285859460

Author:BOYES, William

Publisher:BOYES, William

Chapter31: Capital Markets

Section: Chapter Questions

Problem 8E

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Question

Suppose you are an analyst with the following data:

rRF = 5.5%

rM – rRF = 6%

b=0.8

D1 = $1.00

P0 = $25.00

g = 6%

firm’s bond yield = 6.5%

a) What is this firm’s cost of equity using the DCF?

b) What is this firm’s cost of equity using the bond-yield-plus-risk-premium approach? Use the midrange of the judgmental risk premium for the bond-yield-plus-risk-premium approach.

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.

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