Show your work. how to solve it? Continuing with the same company as above, Lee's management has
Question:
Show your work. how to solve it?
Continuing with the same company as above, Lee's management has surveyed institutional investors and ascertained that they would require a premium of 4% over the firm's bond yield in order to be induced to invest in the company's common stock.Based on the information in this problem (#4), estimate Lee's marginal cost of common equity
Based on your estimates of Lee's cost of common equity in #2, #3, and #4A, estimate Lee's marginal cost of common equity.
Here is the common equity it is referring to in questions 2 and 3.
In 2 it was common stock earnings per share (EPS) of $6 for the year just ended. Its retention ratio is consistent at 50%.Analysts expect that the company's earnings and per-share dividends will grow at a constant rate of 4.25% for the foreseeable future. Each share of Lee's common stock is currently trading for $65.80.Using the information provided here, estimate Lee's marginal cost of common equity.
This came out to 9% ( If I did it right).
In 3 a stock volatility that is 25% greater than that of the "market portfolio". The yield on 10-year Treasury bonds is 2.55%, and the expected market risk premium (MRP) is 5.25%. Based on this information, estimate Lee's marginal cost of common equity.
I got 9.11 % on it.