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Bunkhouse Electronics is a recently incorporated firm that makes electronic entertainment systems
Bunkhouse Electronics is a recently incorporated firm that makes electronic entertainment systems. Its earnings and dividends have been growing at a rate of 38.0%, and the current dividend yield is 10.00%. Its beta is 1.36, the market risk premium is 16.00%, and the risk-free rate is 2.40%. a. Use the CAPM to estimate the firm's cost of equity. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Cost of equity 48.00% b. Now use the constant growth model to estimate the cost of equity. (Do not round intermediate calculations. Enter your answer as a whole percent.) Cost of equity 21 % c. Which of the two estimates is more reasonable? ????? Growth model
Expert Solution
a. The cost of equity is computed as shown below:
= risk free rate + beta x market risk premium
= 2.4% + 1.36 x 16%
= 24.16%
b. The cost of equity is computed as follows:
= Dividend yield + growth rate
= 10% + 38%
= 48%
c. CAPM method is more reasonable.
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