Question

XYZ currently has common stock trading at $40 per share. XYZ just paid a dividend of $2.00 per share, which is expected to grow at a constant rate of 5%. XYZ's beta is 1.5, the risk-free rate is 2%, and the market return is expected to be 8%.  The pre-tax yield on XYZ's bonds is 7%. XYZ's finance department believes that new stock would require a premium of 5% over their own bond yield.  Flotation cost for issuing new stock is 10%.

Compute the cost of retained earnings using the capital asset pricing model

Compute the cost of retained earnings using the bond yield plus risk premium approach

Compute the cost of new common stock using the discounted cash flow method

Answer 1

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ke - Microsoft Excel (Product Activation Failed) Add-Ins View - 2x Dr General File Home Insert Page Layout Formulas Data Review % Cut Calibri -11AA = = = Ea Copy Paste Format Painter BIU - D A Clipboard Font CD721 fax SF Wrap Text Merge Merge & Center - Center *** $ % % , 4:0 .00 :.: Insert Delete Format Conditional Format Cell Formatting as Table Styles Styles Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select Alignment Number Cells CA СВ cc CD E F G C C 712 713 714 715 716 CAPM APPROACH REQUIRED RATE = Rf + beta(Rm-Rf) Rm-Rf = RISK PREMIUM =6%, Rf =5% kr = 2% + 1.5(8%-2%) = 11.00% 717 718 719 720 721 722 2 BOND YIELD PLUS APPROACH kr = BOND RATE + RISK PREMIUM kr = 7% + 5% = 12.00% 723 3 DISCOUNTED CASH FLOW APPROACH DO = 2.00, PO =40, g =5%, f = 10% D1 = DO*(1+g) = 2.00*(1+0.05) = 2.10 724 725 726 727 728 ke = D1/(PO(1-f)) +g ke = 2.10/40*(1-0.10)) + 0.05 = 10.83% 729 730 HE Rea convexity DGM betaport future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR right KE CAPM UTILITY, SHARPE, beta ferences: G239 clean YIELD bond portfolio cap stru WACC RESI el BO 130% - .HEK A * 0 ENG 03:57 22-11-2019