A risk analyst gives Sun Microsystems, the networking computer firm, a CAPM equity beta of 1.38. The risk-free rate is 4.0 percent.
a. Prepare a table with the cost of capital that you would calculate for the equity with the following estimates of the market risk premium:
4.5%
6.0%
7.5%
9.0%
b. Other analysts disagree on the beta, with estimates ranging from 1.25 to 1.55. Prepare a table that gives the cost of capital for each estimate of the market risk premium and beta estimates of 1.25 and 1.55.
c. In early July 2008, analysts were forecasting earnings of $0.54 per share for the fiscal year ending June 30, 2009. They were also forecasting a P/E ratio for the firm of 20 in June 2009. The company pays no dividends. Calculate the current value of the stock in July 2008 for this P/E forecast using the lowest and highest cost of capital estimates from part b.