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Quantitative Problem: 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 $1.70 and it expects dividends to grow at a constant rate g = 6%. The firm's current common stock price, P0, is $22.00. The current risk-free rate, rRF, = 4%; the market risk premium, RPM, = 5.3%, and the firm's stock has a current beta, b, = 1. Assume that the firm's cost of debt, rd, is 8.21%. The firm uses a 3.3% risk premium when arriving at a ballpark estimate of its cost of equity using the bond-yield-plus-risk-premium approach. What is the firm's cost of equity using each of these three approaches? Round your answers to 2 decimal places.
CAPM cost of equity: %
Bond yield plus risk premium: %
DCF cost of equity: %
Quantitative Problem: Barton Industries can issue perpetual preferred stock at a price of $47 per share. The stock would pay a constant annual dividend of $3.20 per share. If the firm's marginal tax rate is 40%, what is the company's cost of preferred stock? Round your answer to 2 decimal places. %
Fred plans to purchase a car four years from now. The car will cost $57,325 at that time. Assume that fred can earn 8.56 percent compounded monthly on his money. How much should he set aside today for the purchase?
The mortgage on your house is five years old. It required monthly payments of $1402, had an original term of 30 years, and had an interest rate of 10% (APR). What monthly repayments will be required with the new loan? Suppose you are willing to conti..
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Teresa’s manufacturing plant is destroyed by fire. The plant has an adjusted basis of $270,000, and Teresa receives insurance proceeds of $410,000 for the loss. Teresa reinvests $420,000 in a replacement plant. Calculate Teresa’s recognized gain if s..
Prepare a schedule of cash collections for May through July and compute the materials price variance and the materials quantity variance.
Suppose you have an investment opportunity that requires a $40,000 initial investment, but will repay you $20,000 over each of the next three years.
the return on capital and reinvestment rates for the last fiscal year can be sustained forever. Estimate the Cost of Equity.
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What is the NPV for a project if its cost of capital is 12 percent and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and ($1,..
Consider the following three bond quotes: a Treasury note quoted at 98:27, a corporate bond quoted at 103.10, and a municipal bond quoted at 101.75. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value..
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