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Suppose you are an analyst with the following data: rRF = 5.5% rM – rRF =...

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.

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Answer #1

Part A:

Ke as per DCF = [ D1 / P0 ] +g

= [ $ 1 / $ 25 ] + 0.06

= 0.04 + 0.06

= 0.10

Part B:

Ke as per Bond yield + Risk premium approach

= Yield of Long term debt + Equity Risk Premium

= 6.5% + 6%

= 12.5%

Pls comment, if any further assistance i srequired

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