On an excel Spreadsheet, do the following problem Cost of RetainedEarnings12-22 The earnings, dividends, and stock price of Talukdar Technologies Inc. areexpected to grow at 7 percent per year in the future. Talukdar's common stocksells for $23 per share, its last dividend was $2.00, and the company will pay adividend of $2.14 at the end of the current year.Using the discounted cash flow approach, what is its cost of retainedearnings?b.If the firm's beta is 1.6, the risk-free rate is 9 percent, and the averagereturn on the market is 13 percent, what is the firm's cost of equity usingthe CAPM approach?a.C.d.If the firm's bonds earn a return of 12 percent, what is r, using the bond-yield-plus-risk-premium approach? (Hint: Use the midpoint of the riskpremium range discussed in the chapter.)Based on the results of parts (a) through (c), what would you estimateTalukdar's cost of retained earnings to be? Bond-Yield-Plus-Risk-Premium Approach (rs = rd + RP)Although it is a subjective procedure, analysts often estimate a firm's cost of com-mon equity by adding a risk premium of 3 to 5 percentage points to the before-taxcost of debt. It is logical to think that firms with risky, low-rated, and consequentlyhigh-interest-rate debt will also have risky, high-cost equity. Using this logic to esti-mate the cost of retained earnings is relatively easy-we simply add a risk premiumto a readily observable debt cost. For example, Daflex's cost of equity might be esti-mated as follows:rs = Bond yield + Risk premium+Id10.0% +=RP4.0%= 14.0%Because the 4 percent risk premium is a judgmental estimate, the estimated value ofr, also is judgmental. Empirical work suggests that the risk premium over a firm'sown bond yield generally has ranged from 3 to 5 percentage points, so this methodis not likely to produce a precise cost of equity-about all it can do is get us "intothe right ballpark."We have used three methods to estimate the cost of retained earnings, which shouldbe a single number. To summarize, we found the cost of common equity to be (1) 13.5percent using the CAPM method; (2) 14.5 percent using the constant growth model, theDCF approach; and (3) 14.0 percent with the bond-yield-plus-risk-premium approach.

Given: Particulars Growth rate 7% Price $23.00 Last dividend $2.00 Expected dividend…

12-22 The earnings, dividends, and stock price of Talukdar Technologies Inc. are expected to grow at 7 percent per year in the future. Talukdar's common stock sells for $23 per share, its last dividend was $2.00, and the company will pay a dividend of $2.14 at the end of the current year. a. Using the discounted cash flow approach, what is its cost of retained earnings? b. If the firm's beta is 1.6, the risk-free rate is 9 percent, and the average return on the market is 13 percent, what is the firm's cost of equity using the CAPM approach? If the firm's bonds earn a return of 12 percent, what is r, using the bond- yield-plus-risk-premium approach? (Hint: Use the midpoint of the risk premium range discussed in the chapter.) C. d. Based on the results of parts (a) through (c), what would you estimate Talukdar's cost of retained earnings to be?

12-22 The earnings, dividends, and stock price of Talukdar Technologies Inc. are expected to grow at 7 percent per year in the future. Talukdar's common stock sells for $23 per share, its last dividend was $2.00, and the company will pay a dividend of $2.14 at the end of the current year. a. Using the discounted cash flow approach, what is its cost of retained earnings? b. If the firm's beta is 1.6, the risk-free rate is 9 percent, and the average return on the market is 13 percent, what is the firm's cost of equity using the CAPM approach? If the firm's bonds earn a return of 12 percent, what is r, using the bond- yield-plus-risk-premium approach? (Hint: Use the midpoint of the risk premium range discussed in the chapter.) C. d. Based on the results of parts (a) through (c), what would you estimate Talukdar's cost of retained earnings to be?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Credenza Industries is expected to pay a dividend of $1.55 at the end of the coming year. It is expected to sell for $68 at the end of the year. If its equity cost of capital is 10%, what is the expected capital gain from the sale of this stock at the end of the coming year? OA. $63.23 OB. $4.77 O.C. $61.82 OD. $6.18
The earnings, dividends, and stock price of Shelby Inc. are expected to grow at 8% per year in the future. Shelby's common stock sells for $26 per share, its last dividend was $2.00, and the company will pay a dividend of $2.16 at the end of the current year. a. Using the discounted cash flow approach, what is its cost of equity? Round your answer to two decimal places. 16.31 % b. If the firm's beta is 1.1, the risk-free rate is 9%, and the expected return on the market is 14%, then what would be the firm's cost of equity based on the CAPM approach? Round your answer to two decimal places. 14.50% c. If the firm's bonds earn a return of 11%, then what would be your estimate of rs using the own-bond-yield-plus-judgmental-risk-premium approach? (Hint: Use the mid-point of the risk premium range.) Round your answer to two decimal places. 14 % d. On the basis of the results of parts a-c, what would be your estimate of Shelby's cost of equity? Assume Shelby values each approach equally.…
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The Mobil Appliance Company’s earnings,dividends, and stock price are expected to grow atan annual rate of 12%. Mobil’s common stock iscurrently traded at $18 per share. Mobil’s last cashdividend was $1.00, and its expected cash dividendfor the end of this year is $1.12. Determine the costof retained earnings (kr)

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