Barton Industries estimates its cost of common equity by using three approaches: the CAPM, the bond-yield-plus-risk-premium approach, and the DCF model. Barton expects next year's annual dividend, D1, to be $2.10 and it expects dividends to grow at a constant rate g = 4.4%. The firm's current common stock price, P0, is $25.00. The current risk-free rate, rRF, = 4.7%; the market risk premium, RPM, = 6.0%, and the firm's stock has a current beta, b, = 1.15. Assume that the firm's cost of debt, rd, is 11.00%. The firm uses a 3.0% risk premium when arriving at a ballpark estimate of its cost of equity using the bond-yield-plus-risk-premium approach. What is th
Barton Industries estimates its cost of common equity by using three approaches: the
| CAPM cost of equity: | % |
| Bond yield plus risk premium: | % |
| DCF cost of equity: | % |
What is your best estimate of the firm's cost of equity?
CAPM
= Risk free rate + beta * market risk premium
Bond yield plus risk premium
= Bond yield + risk premium
DCF
= D1/P0 + g
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