Question

The cost of equity using the CAPM approach The yield on a three-month T-bill is 2.74%, and the yield on a 10-year T-bond is 3.86%-the market risk premium is 6.63%. the Jefferson Company has a beta of 0.78. Using the Capital Asset Pricing Model (CAPM) approach, Jefferson's cost of equity is The cost of equity using the bond yield plus risk premium approach The Lincoln Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company's cost of internal equity. Lincoln's bonds yield 10.28%, and the firm's analysts estimate that the firm's risk premium on its stock over its bonds is 3.55%. Based on the over-own-bond-yield judgmental risk premium approach, Lincoln's cost of internal equity is О 16.60% О 13.14% О 15.21% О 13.83% The cost of equity using the discounted cashflow (or dividend growth) approach Ford Enterprises's stock is currently selling for $45.56 per share, and the fim expects its per-share dividend to be $1.38 in one year. Analysts project the firm's growth rate to be constant at 7.27%. Using the cost of equity using the discounted cashflow (or dividend growth) approach, what is Ford's cost of internal equity? О 9.79% О 10.30% О 13.91% О 12.88%

Answer 1

Answer a.

Risk-free Rate = 3.86%
Beta = 0.78
Market Risk Premium = 6.63%

Cost of Equity = Risk-free Rate + Beta * Market Risk Premium
Cost of Equity = 3.86% + 0.78 * 6.63%
Cost of Equity = 9.03%

Answer b.

Cost of Equity = Bond Yield + Risk Premium
Cost of Equity = 10.28% + 3.55%
Cost of Equity = 13.83%

Answer c.

Cost of Equity = Expected Dividend / Current Price + Growth Rate
Cost of Equity = $1.38 / $45.56 + 0.0727
Cost of Equity = 0.1030 or 10.30%