Question

In: Finance

Cost of? equity: SML.??Stan is expanding his business and will sell common stock for the needed...

Cost of? equity: SML.??Stan is expanding his business and will sell common stock for the needed funds. If the current? risk-free rate is

6.36.3?%

and the expected market return is

13.713.7?%,

the cost of equity for Stan is

a.

10.6710.67?%

if the beta of the stock is

0.590.59.

b.??

12.4412.44?%

if the beta of the stock is

0.830.83.

c.??

14.0714.07?%

if the beta of the stock is

1.051.05.

d.??

16.3616.36?%

if the beta of the stock is

1.361.36.

Suppose Stan had to delay the sale of the common stock for six months. When he finally did sell the? stock, the? risk-free rate had fallen to

5.35.3?%,

but the expected return on the market had risen to

14.714.7?%.

What was the effect on the cost of equity by waiting six? months, using the four different? betas? What do you notice about the increases in the cost of equity as beta? increases?

Solutions

Expert Solution

1) ROE has increased. Although, risk free rate is decreased, but market premium ( Market return - Risk free rate) has increased. Hence, ROE = Risk Free Rate + Beta x(Market Return - Risk Free) - ROE has increased. Compariosn is shown in below tables

2) ROE is postivile related with Beta. Hence, with the increase of beta, ROE will also increase.

Question Risk Free Rate Beta Market Return ROE = Risk Free Rate + Beta x(Market Return - Risk Free)
6.3630% 13.7137%
a 6.3630% 0.59059 13.7137% 10.70%
b 6.3630% 0.83083 13.7137% 12.47%
c 6.3630% 1.05105 13.7137% 14.09%
d 6.3630% 1.36136 13.7137% 16.37%
After 6 Months
Question Risk Free Rate Beta Market Return ROE = Risk Free Rate + Beta x(Market Return - Risk Free)
5.3530% 14.7140%
a 5.3530% 0.59059 14.7140% 10.88%
b 5.3530% 0.83083 14.7140% 13.13%
c 5.3530% 1.05105 14.7140% 15.19%
d 5.3530% 1.36136 14.7140% 18.10%

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

Stan is expanding his business and will sell common stock for the needed funds. If the...
Stan is expanding his business and will sell common stock for the needed funds. If the current​ risk-free rate is 3.7​% and the expected market return is 10.5​%, what is the cost of equity for Stan if the beta of the stock is a) 0.79? b) 0.85? c) 1.05? d) 1.15?
Cost of common stock equity Ross Textiles wishes to measure its cost of common stock equity....
Cost of common stock equity Ross Textiles wishes to measure its cost of common stock equity. The​ firm's stock is currently selling for ​$64.19. The firm just recently paid a dividend of ​$4.04. The firm has been increasing dividends regularly. Five years​ ago, the dividend was just ​$2.99. After underpricing and flotation​ costs, the firm expects to net $58.41 per share on a new issue. A. Determine average annual dividend growth rate over the past 5 years. Using that growth​...
Cost of common stock equity Ross Textiles wishes to measure its cost of common stock equity....
Cost of common stock equity Ross Textiles wishes to measure its cost of common stock equity. The firm's stock is currently selling for $41.16. The firm just recently paid a dividend of $3.97. The firm has been increasing dividends regularly. Five years ago, the dividend was just $2.99. After underpricing and flotation costs, the firm expects to net $38.28 per share on a new issue. a. Determine average annual dividend growth rate over the past 5 years. Using that growth...
Cost of common stock equity   Ross Textiles wishes to measure its cost of common stock equity....
Cost of common stock equity   Ross Textiles wishes to measure its cost of common stock equity. The​ firm's stock is currently selling for ​$65.88. The firm just recently paid a dividend of ​$3.98. The firm has been increasing dividends regularly. Five years​ ago, the dividend was just ​$3.04. After underpricing and flotation​ costs, the firm expects to net ​$61.93 per share on a new issue. a.  Determine average annual dividend growth rate over the past 5 years. Using that growth​...
Cost of common stock equity   Ross Textiles wishes to measure its cost of common stock equity....
Cost of common stock equity   Ross Textiles wishes to measure its cost of common stock equity. The​ firm's stock is currently selling for ​$49.39. The firm just recently paid a dividend of ​$3.99. The firm has been increasing dividends regularly. Five years​ ago, the dividend was just ​$3.04. After underpricing and flotation​ costs, the firm expects to net ​$43.96 per share on a new issue. a.  Determine average annual dividend growth rate over the past 5 years. Using that growth​...
cost of common stock equity.Ross Textiles wishes to measure its cost of common stock equity. The​...
cost of common stock equity.Ross Textiles wishes to measure its cost of common stock equity. The​ firm's stock is currently selling for $35.41 . The firm expects to pay a $3.25 dividend at the end of the year​ (2016). The dividends for the past 5 years are shown in the following​ table: Year   Dividend per share 2015   2.97 2014   2.65 2013   2.44 2012   2.14 2011   2.06 After underpricing and flotation​ costs, the firm expects to net $32.93 per share on...
Why estimate of cost of equity using SML METHOD is different from cost of equity using...
Why estimate of cost of equity using SML METHOD is different from cost of equity using Dividend growth model method?
Capital component weights, cost of debt, cost of preferred stock, and cost of common equity.
Capital component weights, cost of debt, cost of preferred stock, and cost of common equity. Be sure to use 4 decimal places. Current assets: 3,100 Property, plant and equipment: 3,400 Total assets: 6,500. Current liablities: 1,500 Long term debt: 1,750 Preferred stock, $100 par: 500 Common stock, no par: 1,250 Retained earnings: 1,500 Total liabilities and equities: 6,500 Growth rate 7.5% Coupon on new bonds: 7.75% Corporate tax rate: 25% Dividend on preferred: 8% Price of common stock: $24.00 Price...
How to find the cost of debt, cost of preferred stock, cost of common equity, capital...
How to find the cost of debt, cost of preferred stock, cost of common equity, capital structure, and the weighted average cost of capital for a publicly traded company like Costco or Amazon.
July 1   Sell $10,000 of common stock to Suzie.        1 Sell $10,000 of common stock to...
July 1   Sell $10,000 of common stock to Suzie.        1 Sell $10,000 of common stock to Tony.        1 Purchase a one-year insurance policy for $4,800 ($400 per month) to cover injuries to participants during outdoor clinics.        2 Pay legal fees of $1,500 associated with incorporation.        4 Purchase office supplies of $1,800 on account.        7 Pay for advertising of $300 to a local newspaper for an upcoming mountain biking clinic to be held on July 15. Attendees will be charged $50...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT