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Alik [6]
3 years ago
13

urrently sells for $69.57 per share and has a beta of .91. The market risk premium is 7.40 percent and the risk-free rate is 2.9

7 percent annually. The company just paid a dividend of $3.69 per share, which it has pledged to increase at an annual rate of 3.40 percent indefinitely. What is your best estimate of the company's cost of equity?
Business
1 answer:
masha68 [24]3 years ago
7 0

Answer:

Using Capital Asset Pricing Model

Ke= Rf +β(Market risk-premium)

Ke = 2.97 + 0.91(7.40)

Ke = 9.9%

Using Dividend Growth Model

Ke = Do<u>(1 + g) </u> + g

               Po

Ke = $3.69<u>(1 + 0.034)</u>  + 0.034

                    $69.57

Ke = $3.69<u>(1.034)</u> + 0.034

                  $69.57

Ke = 0.0548  + 0.034

Ke = 0.089 = 9%

The best estimate of the company's cost of equity is 9.9%

Explanation:

Cost of equity is a function of risk-free rate plus the product of beta and market risk-premium according to capital asset pricing model.

Using dividend growth model, cost of equity is a function of current dividend paid, subject to growth rate, divided by current market price plus growth rate.

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Answer:

A. Reject (Alternative 1) $0.00

Accept (Alternative 2) $1.12

Differentials Effect on income (Alternative 2) $1.12

B. Accepted (Alternative 2)

Explanation:

a. Preparation of a differential analysis dated March 16 on whether to reject (Alternative 1) or accept (Alternative 2) the special order.

DIFFERENTIAL ANALYSIS

Reject (Alternative 1) or Accept (Alternative 2)

March 16

Reject Accept Differentials Effect on income

(Alternative 1) (Alternative 2) (Alternative 2)

Revenue per unit $0.00 $7.20 $7.20

Costs:

Variable manufacturing costs per unit

$0.00 -$5.00 -$5.00

Export tariff per unit

$0.00 -$1.08 -$1.08

($7.20*15%=$1.08)

Income (Loss) per unit $0.00 $1.12 $1.12

b. Based on the above differential analysis

the special order should be ACCEPTED (Alternative 2).

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When you construct the replicating portfolio for the option in the previous question how many dollars do you need to invest in t
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Suppose that a demand curve exhibits two points. Initially, at price P 0 P0 , the quantity demanded is Q 0 Q0 . When price chang
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Answer:

Price Elasticity of Demand= \frac{Percentage change in Demand}{Percentage change in Price}

At Price = P_{0}

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Now,

Percentage change in Demand = \frac{(Q_{1} - Q_{0})}{Q_{0}}

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Price Elasticity of Demand = \frac{\frac{(Q_{1} - Q_{0})}{Q_{0}}}{\frac{(P_{1} - P_{0})}{P_{0}}}

Above formula if used will give the correct answer related to Price Elasticity of Demand.

Another variant of above formula is also being used on prominent basis.

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