Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9780077861759
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 13, Problem 1QP
Calculating
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The Lenzie Corporation's common stock has a beta of 1.30. If the risk-free rate is 5.3% and the
expected return on the market is 11%, what is the company's cost of equity capital? (Do not round
intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places.)
Cost of equity capital
%
The cost of raising capital through retained earnings is the cost of raising capital through issuing new common stock.
The cost of equity using the CAPM approach
The current risk-free rate of return (rRFrRF) is 4.67% while the market risk premium is 5.75%. The Jefferson Company has a beta of 0.78. Using the capital asset pricing model (CAPM) approach, Jefferson’s cost of equity is .
The cost of equity using the bond yield plus risk premium approach
The Jackson Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company’s cost of internal equity. Jackson’s bonds yield 11.52%, and the firm’s analysts estimate that the firm’s risk premium on its stock over its bonds is 3.55%. Based on the bond-yield-plus-risk-premium approach, Jackson’s cost of internal equity is:
18.84%
18.08%
15.07%
14.32%
The cost of raising capital through retained earnings is the cost of raising capital through
issuing new common stock.
The cost of equity using the CAPM approach
The current risk-free rate of return (rRFrRF) is 3.86% while the market risk premium is 6.17%.
The Burris Company has a beta of 0.92. Using the capital asset pricing model (CAPM)
approach, Burris's cost of equity is
The cost of equity using the bond yield plus risk premium approach
The Taylor Company is closely held and, therefore, cannot generate reliable inputs with
which to use the CAPM method for estimating a company's cost of internal equity. Taylor's
bonds yield 11.52%, and the firm's analysts estimate that the firm's risk premium on its
stock over its bonds is 4.95%. Based on the bond-yield-plus-risk-premium approach,
Taylor's cost of internal equity is:
16.47%
19.76%
18.12%
15.65%
The cost of eguity usina the discOunted.cash flow for dividend.aroutb) approach
Chapter 13 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 13 - Project Risk If you can borrow all the money you...Ch. 13 - WACC and Taxes Why do we use an aftertax figure...Ch. 13 - SML Cost or Equity Estimation If you use the stock...Ch. 13 - SML Cost or Equity Estimation What are the...Ch. 13 - Prob. 5CQCh. 13 - Cost of Capital Suppose Tom OBedlam, president of...Ch. 13 - Company Risk versus Project Risk Both Dow Chemical...Ch. 13 - Prob. 8CQCh. 13 - Leverage Consider a levered firms projects that...Ch. 13 - Beta What factors determine the beta of a stock?...
Ch. 13 - Calculating Cost of Equity The Dybvig Corporations...Ch. 13 - Prob. 2QPCh. 13 - Calculating Cost of Debt Shanken Corp. issued a...Ch. 13 - Calculating Cost of Debt For the firm in the...Ch. 13 - Calculating WACC Mullineaux Corporation has a...Ch. 13 - Taxes and WACC Miller Manufacturing has a target...Ch. 13 - Finding the Capital Structure Farnas Llamas has a...Ch. 13 - Book Value versus Market Value Filer Manufacturing...Ch. 13 - Calculating the WACC In the previous problem,...Ch. 13 - Prob. 10QPCh. 13 - Finding the WACC Given the following information...Ch. 13 - Finding the WACC Titan Mining Corporation has 8.7...Ch. 13 - SML and WACC An all-equity firm is considering the...Ch. 13 - Calculating Flotation Costs Suppose your company...Ch. 13 - Calculating Flotation Costs Southern Alliance...Ch. 13 - WACC and NPV Och, Inc., is considering a project...Ch. 13 - Prob. 17QPCh. 13 - Flotation Costs Goodbye, Inc., recently issued new...Ch. 13 - Calculating the Cost of Equity Floyd Industries...Ch. 13 - Firm Valuation Schultz Industries is considering...Ch. 13 - Prob. 21QPCh. 13 - Flotation Costs and NPV Photochronograph...Ch. 13 - Flotation Costs Trower Corp. has a debt-equity...Ch. 13 - Project Evaluation This is a comprehensive project...Ch. 13 - Prob. 1MCCh. 13 - Prob. 2MCCh. 13 - Go to www.reuters.com and find the list of...Ch. 13 - You now need to calculate the cost of debt for...Ch. 13 - You now have all the necessary information to...Ch. 13 - You used Tesla as a representative company to...
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- Using the equity asset valuation model (CAPM) equation, determine the required return for the shares of the following companies, if the market return is 7.50% (Rm = 7.50%) and the risk-free asset return is 1.25% (RF = 1.25%). You must show all counts. Stock Beta SKT 0.65 COST 0.90 SU 1.42 AMZN 1.57 V 0.94arrow_forwardThe cost of raising capital through retained earnings is The cost of equity using the CAPM approach the cost of raising capital through Issuing new common stock. The current risk-free rate of return (IRF) IS 4.67% while the market risk premium is 5.75%. The Wilson Company has a beta of 0.78. Using the capital asset pricing model (CAPM) approach, Wilson's cost of equity is The cost of equity using the bond yield plus risk premium approach The Taylor Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company's cost of internal equity. Taylor's bonds yield 10.28%, and the firm's analysts estimate that the firm's risk premium on its stock over its bonds is 3.55%. Based on the bond-yield-plus-risk-premium approach, Taylor's cost of internal equity is: ○ 15.21% O 13.83% 13.14% 17.29% The cost of equity using the discounted cash flow (or dividend growth) approach Tyler Enterprises's stock is currently selling for $25.67…arrow_forwardEstimating Cost of Equity Capital Assume that a company’s market beta equals 0.8, the risk-free rate is 5%, and the market return equals 8%. Compute the company’s cost of equity capital. Round answer to one decimal place (ex: 0.0245 = 2.5%) Answer%arrow_forward
- Hoolahan Corporation’s common stock has a beta of 1.11. Assume the risk-free rate is 4.6 percent and the expected return on the market is 12.1 percent. What is the company’s cost of equity capital? (arrow_forwardWild Swings, Inc.'s stock has a beta of 2.1. If the risk-free rate is 5.9% and the market risk premium is 7.1%, what is an estimate of Wild Swings' cost of equity? Wild Swings, Inc.'s cost of equity capital is ______%arrow_forwardThe Rhaegel Corporation's common stock has a beta of 1.2. If the risk-free rate is 3 percent and the expected return on the market is 12 percent, what is the company's cost of equity capital? Multiple Choice 14.35% 13.8% 17.4% 14.49% 13.11%arrow_forward
- The Rhaegel Corporation's common stock has a beta of 1.8. If the risk-free rate is 4.9 percent and the expected return on the market is 11 percent, what is the company's cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity capital %arrow_forwardSteady Company's stock has a beta of 0.15. If the risk-free rate is 5.9% and the market risk premium is 6.8%, what is an estimate of Steady Company's cost of equity? Steady's cost of equity capital is _________%.arrow_forwardThe Angelina Corporation's common stock has a beta of 1.8. If the risk-free rate is 4.4 percent and the expected return on the market is 12 percent, what is the company's cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity capital %arrow_forward
- The Graber Corporation's common stock has a beta of 1.6. If the risk-free rate is 5.6% and the expected return on the market is 10%, what is the company's cost of equity capital?arrow_forwardThe cost of equity using the CAPM approach The current risk-free rate of return (rRF) is 3.86%, while the market risk premium is 6.63%. the Monroe Company has a beta of 0.92. Using the Capital Asset Pricing Model (CAPM) approach, Monroe's cost of equity isarrow_forwardThe cost of raising capital through retained eamings is the cost of raising capital through issuing new common stock. The cost of equity using the CAPM approach The current risk-free rate of return (rRF) is 4.23 % , while the market risk premium is 6.63 %. the D'Amico Company has a beta of 0.78. Using the Capital Asset Pricing Model (CAPM) approach, D'Amico's cost of equity is The cost of equity using the bond yield plus risk premium approach The Hoover Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company's cost of internal equity. Hoover's bonds yield 11.52%, and the fim's analysts estimate that the firm's risk premium on its stock over its bonds is 3.55 %. Based on the bond-yield-plus-risk-premium approach, Hoover's cost of internal equity is: 18.08% 14.32% 15.07% 18.84% The cost of equity using the discounted cashflow (or dividend growth) approach Kirby Enterprises's stock is currently selling for $32.45…arrow_forward
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