Steve's Specialties, Inc. paid its dividend yesterday, which as $1.50. The dividend has been growing at a rate of 0.050 and is expected to continue indefinitely at that rate. Steve's common stock is currently trading at 21.00 per share. The firms beta is 0.94. Treasuries (T-bills) are currently yielding 0.020, Average return on the market is 0.10. Using the CAPM, what is Steve's cost of retained earnings?

Steve's Specialties, Inc. paid its dividend yesterday, which as $1.50. The dividend has been growing at a rate of 0.050 and is expected to continue indefinitely at that rate. Steve's common stock is currently trading at 21.00 per share. The firms beta is 0.94. Treasuries (T-bills) are currently yielding 0.020, Average return on the market is 0.10. Using the CAPM, what is Steve's cost of retained earnings?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter15: Dividend Policy

Section: Chapter Questions

Problem 15P

See similar textbooks

Similar questions

CALCULATING THE WACC Here is the condensed 2019 balance sheet for Skye Computer Company (in thousands of dollars): Skyes earnings per share last year were 3.20. The common stock sells for 55.00. last years dividend (D0) was 2.10, and a flotation cost of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Skyes preferred stock pays a dividend of 3.30 per share, and its preferred stock sells for 30.00 per share. The firms before-lax cost of debt is 10%, and its marginal tax rate is 25%. The firms currently outstanding 10% annual coupon rate, long-term debt sells at par value. The market risk premium is 5%, the risk-free rate is 6%, and Skyes beta is 1.516. The firms total debt, which is the sum of the companys short-term debt and long-term debt, equals 1.2 million. a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity. b. Now calculate the cost of common equity from retained earnings, using the CAPM method. c. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between r1 and rs as determined by the DCF method, and add that differential to the CAPM value for rs.) d. If Skye continues to use the same market-value capital structure, what is the firms WACC assuming that (1) it uses only retained earnings for equity and (2) if it expands so rapidly that it must issue new common stock?
Steve's Specialties, Inc. paid its dividend yesterday, which as $3.00. The dividend has been growing at a rate of 0.035 and is expected to continue indefinitely at that rate. Steve's common stock is currently trading at 24.00 per share. The firms beta is 0.88. Treasuries (T-bills) are currently yielding 0.030, Average return on the market is 0.10. Using the DCF approcah, what is steves cost of retained earnings?
Steve's Specialties, Inc. paid its dividend yesterday, which as $2.25. The dividend has been growing at a rate of 0.010 and is expected to continue indefinitely at that rate. Steve's common stock is currently trading at 24.00 per share. The firms beta is 0.98. Treasures (T-bills) are currently yielding 0.040, Average return on the market is 0.08. If the firm issues new common stock, it can be sold at the current market price and the flotation costs are expected to be 0.10 times the market price per share. Using the DCF approach, what is Steve's cost of new common equity?
Meadow Dew Corporation currently has an EPS of $2.30, and the benchmark PE for the company is 22. Earnings are expected to grow at 5 percent per year. a. What is your estimate of the current stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the target stock price in one year? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. Assuming the company pays no dividends, what is the implied return on the company’s stock over the next year?
Eakins Inc.’s common stock currently sells for $50.00 per share, the company expects to earn $2.75 per share during the current year, its expected payout ratio is 70%, and its expected constant growth rate is 6.00%. New stock can be sold to the public at the current price, but a flotation cost of 8% would be incurred. By how much would the cost of new stock exceed the cost of retained earnings?
Master inc's dividends are expected to grow at 5 percent on average into the foreseeable future, they are currently paying out $1.75 per year. - what should be the current price of the stock assuming a 9 percent required return? -if the stock was priced at $40, is the stock under or overvalued? (use two decimals) - Master Inc is expected sales to fall due to competition which will decrease growth to 3%, what impact will this have on the share price and would you sell?
Meadow Dew Corporation currently has an EPS of $3.80, and the benchmark PE for the company is 37. Earnings are expected to grow at 10 percent per year. a. What is your estimate of the current stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the target stock price in one year? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. Assuming the company pays no dividends, what is the implied return on the company’s stock over the next year? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Our company, Mom and Pop Inc is at the the end of the fiscal year. We observe that in the market our stock is worth 290 EUR today. We authorized payment of 30 EUR dividend for this fiscal year, and it was already paid yesterday.. Sales are up, and we are expecting the company to continue to grow at its historical rate of 1.0% per annum. Our accountants report that the return on equity of our company is 30.0%. 1. What returns are investors expecting for equities with a similar risk profile as ours? 2. Calculate the dividend yield
Sidman Products's common stock currently sells for $42 a share. The firm is expected to earn $4.20 per share this year and to pay a year-end dividend of $2.30, and it finances only with common equity If investors require a 10% return, what is the expected growth rate? Do not round intermediate calculations. Round your answer to two decimal places. %
Ivanhoe, Inc., is a mature firm that is growing at a constant rate of 5.62 percent per year. The last dividend that the firm paid was $1.60 per share. If dividends are expected to grow at the same rate as the firm and the required rate of return on Ivanhoe’s stock is 14 percent, what is the market value of the company’s stock? (Round answer to 2 decimal places, e.g. 52.75.) Market value of the company’s stock_____
Eakins Inc.'s common stock currently sells for $55.00 per share, the company expects to earn $2.75 per share during the current year, its expected payout ratio is 70%, and its expected constant growth rate is 6.00%. New stock can be sold to the public at the current price, but a flotation cost of 8% would be incurred. By how much would the cost of new stock exceed the cost of retained earnings? A. 0.21% B. 0.30% C. 0.37% D. 0.24% E. 0.27%
The MEDCOM firm is currently selling for €32, with trailing 12-month earnings and dividends of €1.23 and €0.64, respectively. The Price to Earnings ratio (P/E) is 26, the Price to Book Value ratio (P/BV) is 6.5 and the Price to Sales ratio (P/S) is 2.8. The return on equity is 27 percent and the profit margin on sales is 11 percent. The Treasury bond rate is 4.5 percent, the equity risk premium is 6 percent and MEDCOM’s beta is 1.3. - Calculate the MEDCOM’s required return, based on the Capital Asset Pricing Model.- Assume that the dividend and earnings growth rates are 9.5%. Calculate the P/E, P/BV and P/S ratios that would be justified given the required rate of return in i) and current values of the dividend payout ratio, ROE and profit margin. - Given that the assumptions of the constant growth model are appropriate, state whether MEDCOM is fairly priced, overpriced, or underpriced.