Your prospective investor has also shared some information on his own company:

• Tax rate: 17.00%
• Common stock:
• o2,000 shares currently valued at $74.00 per share
• oHis industry comparable stock beta is 0.90
• oHis business just paid a dividend of $3.15
• oThe dividend is expected to grow by +2.00% per year indefinitely
• Debt:
• o110 bonds outstanding with 13 years to maturity, 4.7 percent coupon and a
• market price of $1,070. The bonds pay interest semi-annually.

(a)Determine the cost of equity using the dividend growth model (DDM) method.

(b)Determine the cost of equity using the Capital Asset Pricing Model (CAPM) method. (5 marks)

(c)Explain the reason(s) for the difference in your estimates under (a) and (b).

(d)Estimate the weight to use for debt when calculating the cost of capital of your

prospective investor.

(e) Determine a WACC estimate for your prospective investor using CAPM.

(8 marks)

Answer rating: 100% (QA)

a Determine the cost of equity using the dividend growth model DDM method Cost of Equity Ke Dividend ... View the full answer