The cost of capital for common stock is (D1/Po)+g. Which of the following statements is true of this model? L The firm must pay a dividend to be able to use this model II. The growth rate (g) can be changed to reflect expected dividend growth II. The market price-to-earnings ratio is not affected by the model Select one: O A. Ionly O B. Iand II only OC Tand lII only OD. 1, 11, and II

The cost of capital for common stock is (D1/Po)+g. Which of the following statements is true of this model? L The firm must pay a dividend to be able to use this model II. The growth rate (g) can be changed to reflect expected dividend growth II. The market price-to-earnings ratio is not affected by the model Select one: O A. Ionly O B. Iand II only OC Tand lII only OD. 1, 11, and II

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter11: Determining The Cost Of Capital

Section: Chapter Questions

Problem 3Q

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As the assistant to the CFO of Johnstone Inc., you must estimate its cost of common equity. You have been provided with the following data: D0 = $0.80; P0 = $22.50; and gL = 8.00% (constant). Based on the dividend growth model, what is the cost of common from reinvested earnings? 10.69% 11.25% 11.84% 12.43% 13.05%
Wyden Brothers uses the CAPM to calculate the cost of equity capital. The company’s capital structure consists of common stock, preferred stock, and debt. Which of the following events will reduce the company’s WACC? a) A reduction in the market risk premium. b) An increase in the risk-free interest rate. c) An increase in the beta of the company’s stock. d) An increase in expected inflation. e) An increase in the flotation costs associated with issuing preferred stock.
A dividend valuation model such as the following is frequent. where: Pi = the current price of Common Stock i D1 = the expected dividend in Period 1 ki = the required rate of return on Stock i gi = the expected constant-growth rate of dividends for Stock i Identify the three factors that must be estimated for any valuation model, and explain why these estimates are more difficult to derive for common stocks than for bonds . Explain the principal problem involved in using a dividend valuation model to value: (1) companies whose operations are closely correlated with economic cycles. (2) companies that are of very large and mature. (3) companies that are quite small and are growing rapidly.
which one is correct please confirm? The cost of equity capital for non-dividend paying stocks can be determined by ____. I. using the Capital Asset Pricing Model II. estimating ke for comparable dividend-paying stocks in their industry a. Only statement I is correct. b. Only statement II is correct. c. Both statements I and II are correct. d. Neither statement I nor II is correct.
What is the expected return on Dunder Mifflin’s stock? What is the weighted average cost of capital for Dunder Mifflin ? NO using excel only by formular
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Since the firm issued new stocks, I calculated two cost of retained earnings (one is rs which is the cost of internal equity or the firm's retained earnings, while the other is re or the cost of the external equity by raising issuing new stock), what should I use in solving the WACC?
One position expressed in the financial literature is that firms set their dividends as aresidual after using income to support new investment.a. Explain what a residual dividend policy implies, illustrating your answer with a tableshowing how different investment opportunities can lead to different dividend payoutratios.b. Think back to Chapter 14 where we considered the relationship between capital structureand the cost of capital. If the WACC-versus-debt-ratio plot was shaped like a sharp V,would this have a different implication for the importance of setting dividends accordingto the residual policy than if the plot was shaped like a shallow bowl (a flattened U)?
which one is correct please confirm? QUESTION 27 All of the following methods may be used to determine the cost of equity capital (k e) for a non-dividend-paying stock EXCEPT ____. a. the risk premium on debt approach b. comparing with similar dividend-paying stocks in the industry c. the Capital Asset Pricing Model approach d. the simulation with growth expectations approach
You have the following information on a company on which to base your calculations and discussion: Cost of equity capital (rE) = 18.55% Cost of debt (rD) = 7.85% Expected market premium (rM –rF) = 8.35% Risk-free rate (rF) = 5.95% Inflation = 0% Corporate tax rate (TC) = 35% Current long-term and target debt-equity ratio (D:E) = 2:5 a. What are the equity beta (bE) and debt beta (bD) of the firm described above?[Hint: Assume that the above costs of capital have been generated by an appropriate equilibrium model.] b. What is the weighted-average cost of capital (WACC) for this firm at the current debt-equity ratio? c. What would the company’s cost of equity capital become if you unlevered the capital structure (i.e. reduced gearing until there is no debt)
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which one is correct please confirm? QUESTION 7 The cost of equity capital for non-dividend paying stocks can be determined by ____. I. using the Capital Asset Pricing Model II. estimating ke for comparable dividend-paying stocks in their industry a. Only statement I is correct. b. Only statement II is correct. c. Both statements I and II are correct. d. Neither statement I nor II is correct.