Longing Toys Inc. has just paid an annual dividend of $0.52 per share. Analysts expect the firm's dividends to grow by 7% forever. Its stock price is $38.6 and its beta is 1.2. The risk-free rate is 3% and the expected return on the market portfolio is 10%. Its bonds have a yield to maturity of 4%, and the risk- premium of Longing's stock over its bonds is 5%. What is the cost of equity according to the constant growth model? What is the cost of equity according to the CAPM? What is the cost of equity according to the bond yield plus risk premium approach? What is your best guess for the cost of equity, using the midpoint of the range?
Longing Toys Inc. has just paid an annual dividend of $0.52 per share. Analysts expect the firm's dividends to grow by 7% forever. Its stock price is $38.6 and its beta is 1.2. The risk-free rate is 3% and the expected return on the market portfolio is 10%. Its bonds have a yield to maturity of 4%, and the risk- premium of Longing's stock over its bonds is 5%. What is the cost of equity according to the constant growth model? What is the cost of equity according to the CAPM? What is the cost of equity according to the bond yield plus risk premium approach? What is your best guess for the cost of equity, using the midpoint of the range?
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter7: Corporate Valuation And Stock Valuation
Section: Chapter Questions
Problem 16P: Crisp Cookware’s common stock is expected to pay a dividend of $3 a share at the end of this year...
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