risk free rate 5.5% market premium 6% beta 0.8 expected dividend $1.00 common stock $25.00 growth 6% bond yeild 6.5% capital struture 25% debt 15% preferred stock 60% common equity tax rate 40% preferred stock price $95 preferred dividend $11. what firm cost of equity using bond yeild risk premium approach use midrange value to calulate risk?
To calculate the firm's cost of equity using the bond yield risk premium approach, we need to follow these steps:
1. Calculate the risk-free rate: In this case, the risk-free rate is given as 5.5%.
2. Determine the market risk premium: The market premium is given as 6%.
3. Calculate the beta: The beta is given as 0.8.
4. Calculate the equity risk premium: To do this, we multiply the market premium by the firm's beta. Equity risk premium = Market premium * Beta. In this case, the equity risk premium would be 6% * 0.8 = 4.8%.
5. Determine the bond yield: The bond yield is given as 6.5%.
6. Calculate the bond yield risk premium: Bond yield risk premium = Bond yield - Risk-free rate. In this case, the bond yield risk premium would be 6.5% - 5.5% = 1%.
7. Determine the weighted average of the equity risk premium and bond yield risk premium: Since we are using the midrange value to calculate the risk, we take the average of the equity risk premium and bond yield risk premium. Average risk premium = (Equity risk premium + Bond yield risk premium) / 2. In this case, the average risk premium would be (4.8% + 1%) / 2 = 2.9%.
8. Calculate the firm's cost of equity: Cost of equity = Risk-free rate + Average risk premium. In this case, the cost of equity would be 5.5% + 2.9% = 8.4%.
Therefore, the firm's cost of equity using the bond yield risk premium approach, with the midrange value as the risk measure, is 8.4%.