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astraxan [27]
3 years ago
7

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) r d = yield on the firm's bonds = 7.00% and the risk premium over its own debt cost = 4.00%. (2) r RF = 5.00%, RP M = 6.00%, and b = 1.25. (3) D 1 = $1.20, P 0 = $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?
Business
1 answer:
LekaFEV [45]3 years ago
7 0

Answer:

Under CAPM:

Re = Rf + Beta(Rm - Rf)

Rf = 5%

Rm - Rf = 6%

Beta = 1.25

Re = 5% + (1.25 x 6%) = 12.5%

Under dividend discount model:

Re = (Div₁ / P₀) + g

Div₁ = $1.20

P₀ = $35

g = 8%

Re = ($1.20 / $35) + 8% = 11.43%

Under bond yield plus risk premium approach:

Re = Pre-tax cost of debt + risk premium over its own debt

Pre-tax cost of debt = 7%

risk premium over its own debt = 4%

Re = 7% + 4% = 11%

The highest cost of equity results from the CAPM model and it is 12.5% while the lowest results from using the bond yield plus risk approach (11%), the difference is 1.5% between them.

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Trina's Trikes have equity of 5.03 million

Explanation:

Debt to equity ratio is the rate of debt as compared to equity of the firm.

We can calculate the amount of equity by using formula of debt to equity

Debt to equity = Total Debt / Total equity

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Total Equity = 9.2 million / 1.83

Total Equity = 5.03 million

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Answer:

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8 0
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Recently, Curtis Gibson had an interview for the position of a senior manager at a transit service. At the interview, the interv
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