Estimate the cost of equity based

Assignment Help Financial Management
Reference no: EM131065077

The CFO of Lenox Industries hired you as a consultant to help estimate its cost of capital. You have obtained the following data: (1) rd = yield on the firm’s bonds = 7.00% and the risk premium over its own debt cost = 4.00%. (2) rRF = 5.00%, RPM = 6.00%, and b = 1.45. (3) D1 = $1.20, P0 = $35.00, and g = 8.00% (constant). You were asked to estimate the cost of equity based on the three most commonly used methods and then to indicate the difference between the highest and lowest of these estimates. What is that difference?

Reference no: EM131065077

Questions Cloud

Create the current facility : Warren's Diner needed a new location. This establishment spent $65,000 to refurbish an old shop and create the current facility. The firm borrowed 75 percent of the refurbishment cost at 8 percent interest for 11 years. What is the amount of each mon..
What is the amount of each monthly payment : Warren's Diner needed a new location. This establishment spent $65,000 to refurbish an old shop and create the current facility. The firm borrowed 75 percent of the refurbishment cost at 8 percent interest for 11 years. What is the amount of each mon..
What is the value of this annuity four years from now : A 4-year annuity of eight $6,200 semiannual payments will begin 6 years from now, with the first payment coming 6.5 years from now. If the discount rate is 7 percent compounded semiannually, what is the value of this annuity 4 years from now?
Percentage of sale on pro forma balance sheet : Of the following, which accounts are used to track sales in calculating a percentage of sale on a Pro Forma Balance Sheet? Short Term Investment Other Current Assets Long Term Investments Goodwill Intangible Assets Accumulated Amortization Other Asse..
Estimate the cost of equity based : The CFO of Lenox Industries hired you as a consultant to help estimate its cost of capital. You have obtained the following data: (1) rd = yield on the firm’s bonds = 7.00% and the risk premium over its own debt cost = 4.00%. You were asked to estima..
Some new potato chip-making equipment : Today, Snack Foods, Inc. is investing $327,000 in some new potato chip-making equipment. The company expects the cash flows to increase by $76,000 a year for the next three years and $93,000 a year for the following two years as a result of this inve..
What are your feelings about plagiarism : What are your feelings about plagiarism? Where should the line be drawn? Is it fair to flunk a writer who plagiarizes? Should a little plagiarism be allowed? Explain from the side of a student and from the side of an instructor
Find bond value-current yield and capital gains yield : An unconventional bond offers a coupon rate of 5% for the first 5 years of the bond and 7% for the remaining 8 years of the bond. Face value is $1,000 and the yield to maturity is 8%. Find bond value, current yield, and capital gains yield this year...
Expected to happen as you randomly add stocks to portfolio : Which of the following statements best describes what would be expected to happen as you randomly add stocks to your portfolio?

Reviews

Write a Review

Financial Management Questions & Answers

  Debt and equity ratio

Black Knight has debt/Equity ratio of .6, a Beta of 1.12, a stock price of 42/share, and a tax rate of 34%. The firm just paid an annual dividend of $0.80/share and plans to increase that amount by 3% annually in the future. The firm has pre tax cost..

  Explain what is the amount of the average daily float

On average, it takes two days for the funds from these checks to be added to the firm's available balance at the bank once they have been deposited. What is the amount of the average daily float?

  The resource amount needed to cover cash conversion cycle

Top Hat Industries is trying to improve cash management. What is Top Hat’s cash conversion cycle? What is the resource amount needed to cover the cash conversion cycle? How could management positively affect the cash conversion cycle?

  Fast-growing firm recently paid a dividend

A fast-growing firm recently paid a dividend of $0.25 per share. The dividend is expected to increase at a 30 percent rate for the next three years. Afterwards, a more stable 15 percent growth rate can be assumed. If a 16 percent discount rate is app..

  Explain why you decided on these two and not the other four

Which two of the six methods used to evaluate projects, and to decide whether or not they should be accepted, do you prefer as a financial manager? Explain why you decided on these two and not the other four. List the perceived deficiencies of the fo..

  What is your return rate in one year

Last year, you purchased a $1,000 par value bond with a 7.5% annual coupon and a 20-year maturity. At the time of the purchase, it had an expected YTM of 8%. After receiving the coupon, you sold the bond today for $930. What is your return rate in on..

  Considering the construction of a new plant

Microwave Oven Programming, Inc is considering the construction of a new plant. The plant will have an initial cash outlay of $8.3 million (= -$8.3 million), and will produce cash flows of $3.3 million at the end of year one, $5.3 million at the end ..

  Case study — natalie

Outline in detail the steps a Lender should take in order to document, settle and administer this application, post-approval - What communication skills might you use to establish and confirm Natalie's level of knowledge about credit and finance a..

  Net income of net income-cash coverage ratio

Elddir, Inc. has net income of net income of 9000, a tax rate of 34%, interest expense of 2940 and deducted depreciation expense of 2730. What is Elddir’s cash coverage ratio?

  How much can you withdraw each year in your retirement

You are planning your retirement in 10 years. You currently have $176,000 in a bond account and $616,000 in a stock account. You plan to add $6,400 per year at the end of each of the next 10 years to your bond account. How much can you withdraw each ..

  Policymakers should do to the fed funds rate

What does the Taylor rule imply that policymakers should do to the fed funds rate under the following scenarios?

  Business environment has changed

The business environment has changed in the past ten years. What are some factors in the current environment causing businesses to change and how is it affecting the way they use cost management? How does this impact their competitive strategies?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd