Reference no: EM132547881

Question i. The future earnings, dividends, and common stock price of ABC Inc. are expected to grow 7% per year. Common stock currently sells for Rs.23.00 per share; its last dividend was Rs.2.00.

a. Using the DCF approach, what is its cost of common equity?

b. If the firm's beta is 1.6, the risk-free rate is 9%, and the average return on the market is 13%, what will be the firm's cost of common equity using the CAPM approach?

c. If the firm's bonds earn a return of 12%, based on the bond-yield-plus-risk-premium approach, what will be rs?

d. If you have equal confidence in the inputs used for the three approaches, what is your estimate of cost of common equity?

Question ii. Your preferred stock pays Rs.20.00 as dividend. The current price of the stock is Rs.110.00 with the flotation costs of 5% of the market price per share. Calculate the cost of the stock with flotation?

Question iii. You have only debt and common equity. The interest rate is 10% at current capital structure of 55% debt and 45% common equity. You paid last dividend as Rs.2, the growth rate is expected as 4%, and the price of the stock is Rs.20. Tax is 40%. Two investment opportunities are available; Y with a rate of return of 15%, and Z with a return of 12%. There is an equal risk pertains to each opportunity.

a. Calculate cost of equity?

b. Calculate the WACC?

c. Which opportunity should you accept?