Gb560 Unit 6
Unit 5 Assignment
Charles Murphy
GB-540
9-10
The earnings, dividends, and stock price of Shelby Inc. are expected to grow at 7% per year in the future. Shelby’s common stock sells for $23 per share, its last dividend was $2.00, and the company will pay a dividend of $2.14 at the end of the current year.
a. Using discounted cash flow approach, what is the cost of equity?
Using the formula of ks = [pic] + g, you would take the cost dividend($2.14) divided by the stock share price of $23 and and that to the growth rate of 7% and the answer would be 16.3%.
b. If the firm’s beta is 1.6, the risk free rate is 9% and the expected return on the market is 13%, what will be the firm’s cost of equity using the CAPM approach?
For this you would use the formula of Expected Rate of Return = r = rf + B (rm - rf) where Rf is the Risk free rate and B is the Beta amd Rm is the expected market return. So the calculations would look like 9% + (13% - 9%)1.6 = 9% + (4%)1.6 = 9% + 6.4% = 15.4%.
c. If the firm’s bonds earn a rate of return of 12%, what will rs be using the bond-yield-plus-risk-premium approach? Use the midpoint of the risk premium range.
For this you would use the formula of bond rate + risk premium and the middle is 4.
12% + 4% = 16%.
d. On the basis of the results of parts a through c, what would you estimate Shelby’s cost of equity to be?
To figure this you would need to do basic math and find the average of the three totals
and that is 15.9%
10-1
|1 |$12,000 |$10,714.80 |41,410.20 |
|2 |$12,000 |$9,556.40 |31,843.80 |
|3 |$12,000 |8,541.60 |23,302.20 |
|4 |$12,000 |7,626 |15,676.20 |
|5 |$12,000 |6,808.80 |8,867.40 |
|6 |$12,000 |6,079.20 |2,788.20 |
|7 |$12,000 |5,427.60 |2,639.40 |
|8 |$12,000
Charles Murphy
GB-540
9-10
The earnings, dividends, and stock price of Shelby Inc. are expected to grow at 7% per year in the future. Shelby’s common stock sells for $23 per share, its last dividend was $2.00, and the company will pay a dividend of $2.14 at the end of the current year.
a. Using discounted cash flow approach, what is the cost of equity?
Using the formula of ks = [pic] + g, you would take the cost dividend($2.14) divided by the stock share price of $23 and and that to the growth rate of 7% and the answer would be 16.3%.
b. If the firm’s beta is 1.6, the risk free rate is 9% and the expected return on the market is 13%, what will be the firm’s cost of equity using the CAPM approach?
For this you would use the formula of Expected Rate of Return = r = rf + B (rm - rf) where Rf is the Risk free rate and B is the Beta amd Rm is the expected market return. So the calculations would look like 9% + (13% - 9%)1.6 = 9% + (4%)1.6 = 9% + 6.4% = 15.4%.
c. If the firm’s bonds earn a rate of return of 12%, what will rs be using the bond-yield-plus-risk-premium approach? Use the midpoint of the risk premium range.
For this you would use the formula of bond rate + risk premium and the middle is 4.
12% + 4% = 16%.
d. On the basis of the results of parts a through c, what would you estimate Shelby’s cost of equity to be?
To figure this you would need to do basic math and find the average of the three totals
and that is 15.9%
10-1
|1 |$12,000 |$10,714.80 |41,410.20 |
|2 |$12,000 |$9,556.40 |31,843.80 |
|3 |$12,000 |8,541.60 |23,302.20 |
|4 |$12,000 |7,626 |15,676.20 |
|5 |$12,000 |6,808.80 |8,867.40 |
|6 |$12,000 |6,079.20 |2,788.20 |
|7 |$12,000 |5,427.60 |2,639.40 |
|8 |$12,000