Bunkhouse Electronics is a recently incorporated firm that makes electronic entertainment systems. Its earnings and dividends have been growing at a rate of 38.5%, and the current dividend yield is 10.50%. Its beta is 1.37, the market risk premium is 16.50%, and the risk-free rate is 2.30%. a. Use the CAPM to estimate the firm's cost of equity. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Cost of equity % b. Now use the constant growth model to estimate the cost of equity. (Do not round intermediate calculations. Enter your answer as a whole percent.) Cost of equity

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter3: Evaluation Of Financial Performance
Section: Chapter Questions
Problem 13P
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Bunkhouse Electronics is a recently incorporated firm that makes electronic entertainment systems. Its earnings and dividends have
been growing at a rate of 38.5%, and the current dividend yield is 10.50%. Its beta is 1.37, the market risk premium is 16.50%, and the
risk-free rate is 2.30%.
a. Use the CAPM to estimate the firm's cost of equity. (Do not round intermediate calculations. Enter your answer as a percent
rounded to 2 decimal places.)
Cost of equity
%
b. Now use the constant growth model to estimate the cost of equity. (Do not round intermediate calculations. Enter your answer as
a whole percent.)
Cost of equity
%
c. Which of the two estimates is more reasonable?
Transcribed Image Text:Bunkhouse Electronics is a recently incorporated firm that makes electronic entertainment systems. Its earnings and dividends have been growing at a rate of 38.5%, and the current dividend yield is 10.50%. Its beta is 1.37, the market risk premium is 16.50%, and the risk-free rate is 2.30%. a. Use the CAPM to estimate the firm's cost of equity. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Cost of equity % b. Now use the constant growth model to estimate the cost of equity. (Do not round intermediate calculations. Enter your answer as a whole percent.) Cost of equity % c. Which of the two estimates is more reasonable?
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