Question

Eaton Electronic Company’s treasurer uses both the capital asset pricing model and the dividend valuation model to compute the cost of common equity (also referred to as the required rate of return for common equity). Assume: Rf=3%Rf=3% Km=8%Km=8% β=1.2β=1.2 D1=$0.35D1=$0.35 P0=$14P0=$14 g=8%g=8% Compute KiKi (required rate of return on common equity based on the capital asset pricing model). Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Compute KeKe (required rate of return on common equity based on the dividend valuation model). Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.

          Eaton Electronic Company’s treasurer uses both the capital asset pricing model and the dividend valuation model to compute the cost of common equity (also referred to as the required rate of return for common equity).
Assume:
Rf=3%Rf=3%
Km=8%Km=8%
β=1.2β=1.2
D1=$0.35D1=$0.35
P0=$14P0=$14
g=8%g=8%
Compute KiKi (required rate of return on common equity based on the capital asset pricing model). 
Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.
Compute KeKe (required rate of return on common equity based on the dividend valuation model).
Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.

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Added by Joel R.

Horngren’s Cost Accounting

Srikant M. Datar, Madhav V. Rajan 16th Edition

Instant Answer

Solved by Expert Madhur L

11/23/2023

Step 1

To compute the required rate of return on common equity (Ki and Ke) using both the Capital Asset Pricing Model (CAPM) and the Dividend Valuation Model (DVM), we will follow these steps: Show more…

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Eaton Electronic Company’s treasurer uses both the capital asset pricing model and the dividend valuation model to compute the cost of common equity (also referred to as the required rate of return for common equity). Assume: Rf=3%Rf=3% Km=8%Km=8% β=1.2β=1.2 D1=$0.35D1=$0.35 P0=$14P0=$14 g=8%g=8% Compute KiKi (required rate of return on common equity based on the capital asset pricing model). Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Compute KeKe (required rate of return on common equity based on the dividend valuation model). Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.

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Transcript

00:01 Hello students, here is a question.

00:02 The future earning dividends and the common stock price of covalent technology inc.

00:07 Are expected to grow 6 % per year.

00:10 Chalhans common stock currently sells at $21 .75 per share.

00:15 It's last dividend was $2 and then will pay for 2 .12 dividends at the end of current year.

00:22 So, by using dfc approach, what is the cost of common equity? round your answers to 2 decimal places.

00:28 Jerome, round your immediate calculation.

00:30 So, if the firm's beta is 0 .70, the risk -free rate will be 4 % and the average return of a market is 13%.

00:37 What will be the firm cost on common equity using capm approach? and round your answer to 2 decimal places.

00:45 And the third question is, if the firm bond earned return of 10 % based on the bond yield plus risk premium approach, what will be the amount? so, what is the midpoint of risk premium range of scenario for 10 to 5 on your calculation? round your answer to 2 decimal places.

01:03 And the fourth is, if you have an equal confidence in the input used in the three approaches, what is the estimated chalhans cost of common equity? so, this is our question.

01:13 Let us discuss the answer for this.

01:19 So, here we use the dfc approach to calculate the cost of common equity.

01:29 Dcf approach to calculate cost of common equity...

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