Your boss asks you to compute the cost of equity for ABC Corp. using the capital asset pricing model (CAPM). You use Yahoo! Finance to find out that the beta of the stock is 1.30, the risk-free rate is 3%, and the market risk premium is 5.7%. What is your estimate of the cost of equity?

Your boss asks you to compute the cost of equity for ABC Corp. using the capital asset pricing model (CAPM). You use Yahoo! Finance to find out that the beta of the stock is 1.30, the risk-free rate is 3%, and the market risk premium is 5.7%. What is your estimate of the cost of equity?

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter14: Security Structures And Determining Enterprise Values

Section: Chapter Questions

Problem 1hM

See similar textbooks

Related questions

Q: Assuming the CAPM or one-factor model holds, what is the cost of equity for a firm if the firm's…

A: A model that represents the relationship of the required return and beta of a particular asset is…

Q: Calculate the union’s cost of equity from the CAPM using its own beta (0.90) estimate and the…

A: Risk Free Rate = 0.02 Market Risk Premium = 0.07 Union Beta = 0.90 Industry Beta = 1.25

Q: Energy Services has a Beta = 1.6. The risk free rate on a treasury bill is currently 4.05% and the…

A: The given problem can be solved using capital asset pricing model.

Q: If you were asked to compute the equity risk premium for Steel Products, using the historical…

A: Equity Risk Premium: It is the extra return or additional return that an investor is expected to…

Q: Using the equity asset valuation model (CAPM) equation, determine the required return for the shares…

A: A model that represents the relationship of the required return and beta of a particular asset is…

Q: You have been asked to calculate the cost of equity using the Capital Asset Pricing Model (CAPM).…

A: Hello. Since your question has multiple parts, we will solve first question for you. If you want…

Q: very morning, Bob Smith puts his stock pick of the week up on Yahoo! Finance for the world to see.…

A: Stock market is like a mystery and nothing can be predicted easily and slight experience would tell…

Q: An investor holds a portfolio of stocks and is considering investing in the DBB Company. The firm's…

A: Hi, since you have posted a question with multiple sub-parts, we will answer the first 3 as per…

Q: Assuming the market is in equilibrium, what does the market believe will be the stock price at the…

Q: Your estimate of the market risk premium is 5%. The risk-free rate of return is 1% and General…

A: Given:

Q: Aluminum maker Alcoa has a beta of about 1.07, whereas Hormel Foods has a beta of 0.84. If the…

A: The capital asset pricing model describes the relationship between systematic risk and the expected…

Q: For each of the following scenarios, recalculate the intrinsic value of Chevron's shares using the…

A: To calculate k_ equity the conceptual formula is:

Q: Consider information given in the table below and answers the question asked thereafter: iv.…

A: Hi, since multiple questions are posted will answer the first one. Covariance determines the degree…

Q: Stan is expanding his business and will sell common stock for the needed funds. If the current…

A: We are require to calculate the Stan's cost of equity in this question: Cost of equity can be…

Q: You are considering an investment in Justus Corporation's stock, which is expected to pay a dividend…

A: The stock price which is the maximum price to be paid for share consists of dividends and terminal…

Q: Suppose your company has an equity beta of 0.5 and the current risk-free rate is 6.0%. If the…

A: Beta coefficient shows the systematic risk of the assets. The beta factor shows the systematic risk…

Q: Suppose your company has an equity beta of .62 and the current risk-free rate is 4.1%. If the…

A: Equity capital refers to funds raised by a firm by diluting its equity or ownership. With issue of…

Q: Assume you are given the following information for firms A and B: A B D $1,563,400.00…

A: Replication strategy refers to the process of trading to compute the value of the asset on the…

Q: Michael, an analyst at Kitsch Partners (KP), models the stock of the company. Suppose that the…

A: Correct answer is option (d) 13.98%.

Q: this is the first part of my question which I managed to solve but you are gonna need it to solve…

A: EMV analysis (expected monetary value) is a statistical concept that determines the average outcome…

Q: Stan is expanding his business and will sell common stock for the needed funds. If the current…

A: In the given problem we are require to calculate the cost of equity from the following details: Risk…

Q: If a firm cannot invest retained earnings to earn a rate of return______________ (Pick either A-…

A: Greater Than or Equal to: Reason: Retained Earnings are those earnings of the company that are not…

Q: Diamond Drillers is planning to use retained earnings to finance anticipated capital expenditures.…

A: The cost of retained earnings can be computed using the CAPM. The flotation costs are not considered…

Q: Hoolahan Corporation’s common stock has a beta of 1.11. Assume the risk-free rate is 4.6 percent and…

A: Given: Beta = 1.11 Risk free rate = 4.6% Market rate = 12.1%

Q: Corps has a beta of 1.4. If the rate on U.S. Treasury bills is 4.5% and the expected rate of return…

A: In the above question we need to compute the cost of common equity from the below given details :…

Q: The cost of equity using the CAPM approach The current risk-free rate of return (rRF) is 3.86%,…

A: In the given question we require to compute the Monroe's cost of equity. As per Capital asset…

Q: Financial analyst of Castle Investment Trust has gathered the following information on FRIVY Inc.…

A: Share price: Share price is the current market price of the share. It is the price of the share at…

Q: Steady Company's stock has a beta of 0.15. If the risk-free rate is 5.9% and the market risk…

A: The cost of equity capital means the least rate of return, a company must receive on its equity…

Q: you have a capital structure consisting of 30% debt and 70% equity. There is an 8% yield to…

A: Debt = 30% Equity = 70% YTM = 8% Risk Free Rate = 5% Market Risk Premium = 6% Cost of Equity = 12.5%…

Q: e the market risk premium is 5% and the risk-free interest rate is 4%. Using the data, calculate the…

A: As per Capital asset pricing model, Expected return = Risk free rate + Beta * Market risk premium

Q: What is the cost of equity for a firm if the firm's equity has a beta of 1.4, the risk-free rate of…

A: Relevant information: Beta : 1.4 Risk free rate : 3% Expected return on market : 10% Cost of equity…

Q: Express Steel Corporation wishes to calculate its cost of common stock equity, by using the capital…

A: Since you have asked multiple questions, we will solve one question for you. If you want any…

Q: Please select the option that best analyzes the RETURN ON EQUITY for our example company. Return on…

Q: Your estimate of the market risk premium is 6%. The risk-free rate of return is 1% and General…

A: The Capital Asset Pricing Model (CAPM) is a model that gives the connection between the normal…

Q: Aluminum maker Alcoa has a beta of about 1.73, whereas Hormel Foods has a beta of 1.68. If the…

A: The firm with a higher beta would have a higher equity cost of capital. As per CAPM, the equity cost…

Q: For purposes of the Stock Market Game and real-life comparisons as to how an investment has…

A: Return on investment is the percentage rate which shows the percentage of profit earned on the…

Q: You are the investment manager for Global Assets Investments Company's mutual fund and you have…

A: Solution: (i). You pay cash for the stock : No. of the shares that we will able to buy =…

Q: Which statement is correct, all else held constant? A. If you have both the dividend growth and the…

A: Firm issues the various securities to collect funds and pay return on these securities which is cost…

Q: You have risen through the ranks of a coffee comany, from the lowly green-apron barista to the…

A: In the given question we need to calculate the expected return on company's stock. We can solve this…

Concept explainers

Stock Market Indices

Stock indexes are used to compare the price fluctuations of a group of stocks of similar companies, which are combined based on a similar industry or a particular market capitalization limit or type of market. The price comparison is based on a pre-determined standard method or indicators. These stock indexes are usually considered a base for comparison of a particular stock, and the performance of that particular company can be easily determined.

Question

Definition Definition Model that illustrates the correlation between the expected return and risk of capital investment in stock. According to this model, the expected rate of return on equity is equal to the risk-free return added to a risk premium, which is based on the stock beta.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Preston knows his firm's stock has a beta of 1.17, and he'd like to use the CAPM to estimate the cost of equity. If the expected market risk premium is 8.7% and the current T-Bill rate is 2.5%, what should he use as the estimate for the cost of equity? Enter your answer as a decimal and show 4 decimal places. For example, if your answer is 15.55%, enter .1555.
Express Steel Corporation wishes to calculate its cost of common stock equity, by using the capital asset pricing model (CAPM). The firm’s investment advisors and its own analysts indicate that the risk-free rate equals 9,1%; the firm’s beta equals 0,75; and the market return equals 16%. Please estimate the cost of common stock equity by using CAPM.
Please see the attached diagram image. Please show how to solve this problem and please show all steps and formulas in Excel. Based on the Capital Asset Pricing Model (CAPM) and the diagram below, what is the return of the stock if its beta is 1.2 or 0.8?
The CFO of Lenox Industries hired you as a consultant to help estimate its cost of capital. You have obtained the following data: (1) rd = yield on the firm’s bonds = 7.00% and the risk premium over its own debt cost = 4.00%. (2) rRF = 5.00%, RPM = 6.00%, and b = 1.05. (3) D1 = $1.20, P0 = $35.00, and g = 8.00% (constant). You were asked to estimate the cost of equity based on the three most commonly used methods and then to indicate the difference between the highest and lowest of these estimates. What is that difference? 0.43% 0.49% 0.48% 0.38% 0.37%
Landscapers R Us, Inc., has a beta of 1.6 and is trying to calculate its cost of equity capital. If the risk-free rate of return is 4 percent and the expected return on the market is 10 percent, then what is the firm's cost of equity capital?
In an economy where the risk-free interest rate is 19% and the expected return of the market is 25%, the beta coefficients of A, B, C and D stocks and the expected returns announced by the companies are as follows. According to the Financial (Capital) Assets Pricing Model c) Calculate the expected return rates of the shares.d) Determine which stocks can be invested by comparing the expected return announced by the company with the expected return you calculated.
A company hired you as a consultant to help estimate its cost of capital. You have obtained the following data: (1) rd = yield on the firm’s bonds = 7.00% and the risk premium over its own debt cost = 4.00%. (2) rRF = 5.00%, RPM = 6.00%, and b = 1.50. (3) D1 = $1.20, P0 = $35.00, and g = 8.00% (constant). You were asked to estimate the cost of equity based on the three most commonly used methods and then to indicate the difference between the highest and lowest of these estimates. What is that difference? Group of answer choices 2.61% 2.67% 3.54% 3.00% 3.72%
Assume that the Collins Company has a beta of 1.8 and that the risk-free rate of return is 2.5 percent. If the equity-risk premium is six percent, calculate the cost of equity for the Collins Company using the capital asset pricing model.
Steeler Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: risk-free rate (rRF) = 4.15%; market risk premium = 5.00%; and beta = 1.14. Based on the CAPM approach, what is the cost of equity from retained earnings? 9.85% 9.67% 10.60% 10.28% 10.93%
concatti corporation hired your consulting firm to help them estimate the cost of equity. the yeild on the firms bonds is 10.50% and your firms economist believe that the cost of equity can be estimated using a risk premium of 4.85% over a firms own cost of debt. what is an estimate of the firms cost of equity from retained earnings?
You have been hired by the CFO of Lugones Industries to help estimate its cost of common equity. You have obtained the following data: (1) rd = yield on the firm's bonds = 7.00% and the risk premium over its own debt cost = 4.00%. (2) rRF = 5.00%, RPM = 6.00%, and b = 1.25. (3) D1 = $1.20, P0 = $35.00, and g = 8.00% (constant). You were asked to estimate the cost of common based on the three most commonly used methods and then to indicate the difference between the highest and lowest of these estimates. What is that difference? 1.13% 1.50% 1.88% 2.34% 2.58%
Every morning, Bob Smith puts his stock pick of the week up on Yahoo! Finance for the world to see. Every week, Ben Graham seets it, waits a few hours and then buys the stock and it always goes up! This would appear to violate the: a) Weighted Average Cost of Capital b) Volitality Principal c) Capital Asset Pricing Model d) Efficient Market Hypothesis