a). According to the DCF;
kE = [D1 / P0] + g
= [$2.06 / $29.50] + 0.03 = 0.0698 + 0.03 = 0.0998, or 9.98%
b). According to the CAPM,
kE = Risk-free rate + [Beta * (Expected Market Return - Risk-free rate)]
= 7% + [0.7 * (12% - 7%)] = 7% + [0.7 * 5%] = 7% + 3.5% = 10.5%
c). Assume risk premium range is 3%-5%.
Average Risk Premium = [3% + 5%] / 2 = 8% / 2 = 4%
According to bond risk premium approach;
kE = Bond Yield + Average Risk Premium
= 8% + 4% = 12%
d). kE = [9.98% + 10.5% + 12%] / 3 = 32.48% / 3 = 10.83%
VueSUUIU ULU Problem 9-10 Check My Work eBook Problem Walk-Through Problem 9-10 Cost of Equity The earnings, divide...
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