Question

10.

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 $2.40 and it expects dividends to grow at a constant rate gL = 5.7%. The firm's current common stock price, Po, is $23.00. The current risk-free rate, rRF, = 4.7%; the market risk premium, RPM, = 6%, and the firm's stock has a current beta, b, = 1. Assume that the firm's cost of debt, rd, is 9.42%. The firm uses a 4% 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? Do not round intermediate calculations. Round your answers to 2 decimal places. CAPM cost of equity: Bond-Yield-Plus-Risk-Premium: DCF cost of equity:

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 $2.40 and it expects dividends to grow at a constant rate g_L = 5.7%. The firm's current common stock price, P₀, is $23.00. The current risk-free rate, r_RF, = 4.7%; the market risk premium, RP_M, = 6%, and the firm's stock has a current beta, b, = 1. Assume that the firm's cost of debt, r_d, is 9.42%. The firm uses a 4% 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? Do not round intermediate calculations. Round your answers to 2 decimal places.

CAPM cost of equity (%):

Bond-Yield-Plus-Risk-Premium: (%)

DCF cost of equity: (%)

Answer 1

1.
CAPM:
=risk free rate+beta*market risk premium
=4.7%+1*6%
=10.70%

2.
Bond Yield Plus Risk Premium:
=Bond yield+Risk Premium
=9.42%+4%
=13.42%

3.
DCF:
=D1/P0+g
=2.40/23+5.7%
=16.13478%