Metro company has a beta of 1.20, the risk free rate of return is currently ---- (consider the current rate of treasury bills) and the market return is 14%. Thecompany, which plans to pay a dividend of Rs 2.60 per share in the coming year (2007) anticipates that its future dividends will increase at an annual rateconsistent with that experienced over the 2002- 2006 period, when the following dividends were paid.Year2000 2001 2002 2003 2004 2005 2006Div./share 1.73 1.80 1.82 1.95 2.10 2.28 2.45Required:1. Use the capital asset pricing model to determine the required return on giant stock.2. Using the constant growth model and your finding in part a), estimate the value of company stock.

Formula for calculating required rate using CAPM is:

Answered: Metro company has a beta of 1.20, the…

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter7: Corporate Valuation And Stock Valuation

Section: Chapter Questions

Problem 18MC

See similar textbooks

Similar questions

Metro company has a beta of 1.20, the risk free rate of return is currently ----- (consider the current rate of treasury bills) and the market return is 14%. The company, which plans to pay a dividend of Rs 2.60 per share in the coming year (2007) anticipates that its future dividends will increase at an annual rate consistent with that experienced over the 2002- 2006 period, when the following dividends were paid. Year 2000 2001 2002 2003 2004 2005 2006 Div./share 1.73 1.80 1.82 1.95 2.10 2.28 2.45 Use the capital asset pricing model to determine the required return on giant stock.
Metro company has a beta of 1.20, the risk free rate of return is currently ----- (consider the current rate of treasury bills) and the market return is 14%. The company, which plans to pay a dividend of Rs 2.60 per share in the coming year (2007) anticipates that its future dividends will increase at an annual rate consistent with that experienced over the 2002- 2006 period, when the following dividends were paid. Year 2000 2001 2002 2003 2004 2005 2006 Div./share 1.73 1.80 1.82 1.95 2.10 2.28 2.45 Required: Using the constant growth model and your finding in part a), estimate the value of company stock.
Metro enterprises has a beta of 1.20, the risk free rate of return is currently ----- (consider the current rate of treasury bills that is 0.0775) and the market return is 14%. The company, which plans to pay a dividend of Rs 2.60 per share in the coming year (2007) anticipates that its future dividends will increase at an annual rate consistent with that experienced over the 2002- 2006 period, when the following dividends were paid. Year 2000 2001 2002 2003 2004 2005 2006 Div. per share 1.73 1.80 1.82 1.95 2.10 2.28 2.45 Required: Use the capital asset pricing model to determine the required return on Metro stock. Using the constant growth model and your finding in part a), estimate the value of company stock.
The earnings, dividends, and stock price of Shelby Inc. are expected to grow at 7%per year in the future. Shelby’s common stock sells for $23 per share, its last dividend was $2.00, and the company will pay a dividend of $2.14 at the end of thecurrent year.a. Using the discounted cash flow approach, what is its cost of equity?b. If the firm’s beta is 1.6, the risk-free rate is 9%, and the expected return on themarket is 13%, what will be the firm’s cost of equity using the CAPMapproach?c. If the firm’s bonds earn a return of 12%, what will rs be using the bond-yieldplus-risk-premium approach? (Hint: Use the midpoint of the risk premiumrange.)d. On the basis of the results of parts a through c, what would you estimateShelby’s cost of equity to be
Papula Co. has a beta of 1.20, the risk-free rate of 5.5%, and the required market return of 11%: Assuming that La Luna is a constant growth company whose expected dividend next year is P2.25 and expected to grow indefinitely at 6.5%, what is the company's current stock price? Assume that La Luna is expected to experience variable growth of 13% for the next three years, then to return to its long-run constant growth of 6.5%. The company recently P2.10 per share dividend, what is the stock's value under this condition?
The earnings, dividends, and stock price of Shelby Inc. are expected to grow at 4% per year in the future. Shelby's common stock sells for $21 per share, its last dividend was $2.00, and the company will pay a dividend of $2.08 at the end of the current year. Using the discounted cash flow approach, what is its cost of equity? Round your answer to two decimal places. % If the firm's beta is 1.8, the risk-free rate is 7%, and the expected return on the market is 10%, then what would be the firm's cost of equity based on the CAPM approach? Round your answer to two decimal places. % If the firm's bonds earn a return of 9%, then what would be your estimate of rs using the own-bond-yield-plus-judgmental-risk-premium approach? (Hint: Use the mid-point of the risk premium range.) Round your answer to two decimal places. % On the basis of the results of parts a–c, what would be your estimate of Shelby's cost of equity? Assume Shelby values each approach equally. Round your answer…
The future earnings, dividends, and common stock price ofCallahan Technologies Inc. are expected to grow 6% per year. Callahan’s common stockcurrently sells for $22.00 per share, its last dividend was $2.00, and it will pay a $2.12 dividendat the end of the current year.a. Using the DCF approach, what is its cost of common equity?b. If the firm’s beta is 1.2, the risk-free rate is 6%, and the average return on the market is13%, what will be the firm’s cost of common equity using the CAPM approach?c. If the firm’s bonds earn a return of 11%, based on the bond-yield-plus-risk-premiumapproach, what will be rs? Use the midpoint of the risk premium range discussed inSection 10-5 in your calculations.d. If you have equal confidence in the inputs used for the three approaches, what is yourestimate of Callahan’s cost of common equity?

Recommended textbooks for you

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Corporate Fin Focused Approach

Finance

ISBN:

9781285660516

Author:

EHRHARDT

Publisher:

Cengage

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Corporate Fin Focused Approach

Finance

ISBN:

9781285660516

Author:

EHRHARDT

Publisher:

Cengage

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

Intermediate Financial Management (MindTap Course…

Finance

ISBN:

9781337395083

Author:

Eugene F. Brigham, Phillip R. Daves

Publisher:

Cengage Learning

SEE MORE TEXTBOOKS