The earnings, dividends, and stock price of Motortech Inc. are expected to grow at 4% per year

Question:

The earnings, dividends, and stock price of Motortech Inc. are expected to grow at 4% per year in the future. Motortech's common stock sells for $38 per share, its last dividend was $2.80, and the company will pay a dividend of $2.91 at the end of the current year.

a. Using the discounted cash flow approach, what is its cost of equity?

b. If the firm's beta is 1.3, the risk-free rate is 5.0%, and the expected return on the market is 9.0%, what will be the firm's cost of equity using the CAPM approach?

c. If the firm's bonds earn a return of 8%, what will r, be using the bond-yield-plus-riskpremium approach?

d. On the basis of the results of parts a through c, what would you estimate Motortech's cost of equity to be?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Discounted Cash Flows
What is Discounted Cash Flows? Discounted Cash Flows is a valuation technique used by investors and financial experts for the purpose of interpreting the performance of an underlying assets or investment. It uses a discount rate that is most... Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...

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