a, Cost of equity using DCF = Dividend Next Year/Price + Growth
= 2.14/26 + 7% = 15.23%
b. CAPM method Cost of Equity = Risk Free rate + Beta*(Market
Return - Risk Free Rate) =6%+1.5*(12%-6%) =15%
c. As per the book the midpoint is 4% (Range is 3%-5%)
Bond Yield + Risk Premium = 12% +4% = 16%
d. Equal confidence in the inputs of three approaches =
(15.23%+15%+16%)/3 =15.41%
Problem Walk-Through Problem 10-6 Cost of Common Equity The future earnings, dividends, and common stock price...
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