Analyst is estimating the cost of common equity for Cyrene Corp. She prepares the following: Price per share = $50 Expected dividend per share = $3 Expected RR = 30% Expected ROE = 20% Beta = 0.89 Yield to maturity on outstanding debt = 10% Expected market rate of return is 12% and RFR is 3% Analyst determines Cyrene’s cost of common equity is 14%. She most likely used: A. sales comparison approach B. dividend discount model approach C. capital asset pricing model approach D. bond yield plus risk premium approach My question: Bond yield + risk premium does NOT equal 10% + (12%-3%) = 19%. So how do you determine the bond yield + risk premium?
Using CAPM: R_ce = 0.03 + 0.89(0.12-0.03) = 0.11 (not it). Using DDM: R_ce = $3/$50 + 0.06 = 0.12 (not it). Using Bond yield: 0.10 + 0.09 = 0.19 (not it). The analyst must’ve used sales comparison approach.
Yeah that was my thinking Dreary, but the answer is D. so the bond yield + risk premium doesn’t equal 19. i’m wondering how you arrive at 14.
bond yield plus risk premium . risk premium is not equity risk premium. It could be discretionary 3-4% add on. sales comparison approach is nothing, so D
ok that’s all i wanted a confirm of. thanks. they don’t provide bond risk premium in this problem.
what is the source of this q
Schweser Vol 1 Exam 3 PM
the risk premium is not the same when using bond yield + risk premium. read the footnotes in that chapter. very tricky!