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Veronika [31]
3 years ago
9

National Home Rentals has a beta of 1.06, a stock price of $17, and recently paid an annual dividend of $.92 a share. The divide

nd growth rate is 2.2 percent. The market has a rate of return of 11.2 percent and a risk premium of 7.3 percent. What is the estimated cost of equity using the average return of the CAPM and the dividend discount model?
Business
1 answer:
ANEK [815]3 years ago
4 0

Answer:

9.6845%

Explanation:

Market risk premium = Market return - Risk free rate

                             7.3 = 11.2 - Risk free rate

Risk free rate = 3.9%

(1) Use CAPM:

Cost of equity = Risk free rate + Beta × Market risk premium

                        = 3.9% + 1.06(7.3)

                        = 11.638%

(2) Use DDM :

Stock price = [Latest dividend × (1 + dividend growth rate)] ÷ (Cost of equity-dividend growth rate)

$17 = [0.92 (1 + 0.022)] ÷ (Cost of equity - 0.022)

Cost of equity = 7.731%

Cost of equity = average value from using DDM and CAPM

Cost of equity = 0.5 (7.731 + 11.638)

                        = 9.6845%

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Answer:

B. Scenario analysis

Explanation:

Just like the name implies, it involves the analysis or description of various possible outcomes/action/events in the future. It is the process of analyzing future event by considering alternative possible outcomes.

It estimates the expected events.

After the failures suffered by PPG, they thought it better to use a technique that predicts possible occurence in order to avoid a repetition of those failures.

4 0
3 years ago
When a bond is sold at a​ discount, the maturity value is less than the present value of the principal and interest​ payments, b
sweet [91]

Answer:

given statement is False

Explanation:

solution

As given bond sold at the​ discount

maturity value less than present value

but maturity value can not be less than present value of principal and interest

because bond sold at the​ discount

if bond sold at the​ discount  than maturity value will be greater than the resent value of future cash​ flow

so we can say that given statement is False

5 0
3 years ago
If Country A is an agricultural country and Country B has many cities and factories, it would make sense for
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3 years ago
The balance sheet of the Algonquin Company reported assets of $50,000, liabilities of $22,000 and common stock of $15,000. Based
nlexa [21]

Answer:

c) $13,000.

Explanation:

Using the accounting equation;

Assets - liabilities = Owners' equity

Owners' equity is usually made up of the common stock and the retained earnings.

Therefore, given;

Assets = $50,000

Liabilities = $22,000

Owners' equity = $50,000 - $22,000

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Owners' equity = Retained earnings + common stock

Retained earnings = $28,000 - $15,000

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Amount for retained earnings is $13,000.

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hope this helps

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