CFIN -STUDENT EDITION-W/ACCESS >CUSTOM<
6th Edition
ISBN: 9780357753118
Author: BESLEY
Publisher: CENGAGE C
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Question
Chapter 8, Problem 20PROB
Summary Introduction
CAPM:
Calculate the
Cost of new common stock is the cost incurred by the company for issue new common stock.
Calculate the cost of equity as follows:
HE has current price is $37.5 and Current dividend of $2. Risk free rate is 4% and beta is 1.1 and market return is 10%.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Franklin Corporation is expected to pay a dividend of $1.24 per share at the end of the year (D1 = $1.24). The stock sells for $32.40 per share, and its required rate of return is 7.2%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate?
(Round your answer to 2 decimal places.)
Please work out the problem do not use excel.
A firm's common stock has just paid a $3.00 dividend (Do), which is expected to grow at a constant rate of 6.0 percent each year. The beta of this stock is 1.30, the risk-free rate is 4.0 percent, and the expected return on the market is 10.0 percent. Determine how much you should be willing to pay (the intrinsic value) for this stock today. Assume that CAPM is the correct model for required returns.
536.55
$54.83
$63.97
$73:10
545.69
Jersey Jewel Mining has a beta coefficient of 1.2. Currently the risk-free rate is 2 percent and the anticipated return on the market is 8 percent. JJM pays a $4.50 dividend that is growing at 4 percent annually.
What is the required return for JJM?
Given the required return, what is the value of the stock?
If the stock is selling for $100, what should you do?
If the beta coefficient declines to 1.0, what is the new value of the stock?
If the price remains $100, what course of action should you take given the valuation in d?
Could you write the answers in an equation form so i can understand what or how the formulas work
Chapter 8 Solutions
CFIN -STUDENT EDITION-W/ACCESS >CUSTOM<
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
- Toledo Corporation just paid a dividend of D0 = $1 per share. Its dividend is expected to grow at a constant rate of 5% per year in the future. The company's beta is 1.1, the required return on the market (Rm)is 10%, and the risk-free rate (Rf) is 4.0%. What is the company's current stock price? problems should be solved by using a financial calculator or MS excel spreadsheet. Accordingly, you must show the values of all relevant time valu of money variablesarrow_forwardRuntan Inc. has just paid an annual dividend of $0.45 per share. Analysts expect the firm's dividends to grow by 2% forever. Its stock price is $38.7 and its beta is 1.7. The risk-free rate is 2% and the expected return on the market portfolio is 8%. What is the best guess for the cost of equity? Recall that both Dividend Growth Model and CAPM can be used to find cost of equity. Here assume the best guess is the simple average of the two.arrow_forwardschnusenberg corporation just paid a dividend of d0 = $0.75 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future. the company's beta is 1.65, the required return on the market is 10.50%, and the risk-free rate is 4.50%. what is the company's current stock price?arrow_forward
- Jersey Jewel Mining has a beta coefficient of 1.2. Currently the risk-free rate is 2 percent and the anticipated return on the market is 8 percent. JJM pays a $4.50 dividend that is growing at 4 percent annually. What is the required return for JJM? Given the required return, what is the value of the stock? If the stock is selling for $100, what should you do? If the beta coefficient declines to 1.0, what is the new value of the stock? If the price remains $100, what course of action should you take given the valuation in d?arrow_forwardSara Corporation just paid a dividend of D0 = $0.75 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future. The company's beta is 1.25, the required return on the market is 10.50%, and the risk-free rate is 4.50%. What is the company's current stock price?arrow_forwardMilton Data Service just paid a dividend of $4.00 per share on its common stock. Thedividend is expected to grow at 4% per year forever. Currently, the risk-free rate is 5%,the expected market return is 10%, and Milton has a beta of 1.4.a. What should be the current market price per share (i.e., the intrinsic value) of Miltonstock?b. If the actual market price per share is $56, is Milton undervalued or overvalued?How much is the stock mispriced?arrow_forward
- The common stock of Tomorrow, Inc. is selling for P28.75 in the open market. A dividend of P2.86 is expected to distributed and the growth rate of this company is estimated to be 6%. If Franz Babe, an average investor, is considering purchasing this stock at the market price, what is the expected rate of return?arrow_forwardSuppose the risk-free rate of return is 3.5 percent and the market risk premium is 7 percent. Stock U, which has a beta coefficient equal to 0.9, is currently selling for $30 per share. The company is expected to grow at a 4 percent rate forever, and the most recent dividend paid to stockholders was $1.75 per share. Is Stock U correctly priced? Explain.arrow_forwardTanrun Inc. is expected to pay an annual dividend of $0.45 per share in one year. Analysts expect the firm's dividends to grow by 6% forever. Its stock price is $38.6 and its beta is 0.8. The risk-free rate is 2% and the expected market risk premium is 4.5%. 1. What is the best guess for the cost of equity? Recall that both Dividend Growth Model and CAPM can be used to find cost of equity. Here assume the best guess is the simple average of the two.arrow_forward
- The Isberg Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P0?arrow_forwardXYZ company has just paid a dividend of $1.15. The required rate of return on the stock is 13.4%, and investors expect the dividend to grow at a constant 8% in the future. Calculate the current stock value using the Gordon Constant growth model. [Note: you are supposed to show every step of your calculation and interpret the result.] Evaluate Gordons growth model and explain its limitations and why in certain situations the growth model used in part (a) will create incorrect results? [Note: remember to use Harvard referencing to reference your sources]arrow_forwardTanrun Inc. is expected to pay an annual dividend of $0.45 per share in one year. Analysts expect the firm's dividends to grow by 4% forever. Its stock price is $35.1 and its beta is 1.5. The risk-free rate is 2% and the market risk premium is 4.5%. A. What is the best guess for the cost of equity? Recall that both Dividend Growth Model and CAPM can be used to find cost of equity. Here assume the best guess is the simple average of the two.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Dividend disocunt model (DDM); Author: Edspira;https://www.youtube.com/watch?v=TlH3_iOHX3s;License: Standard YouTube License, CC-BY