Ask Question
BusinessBusiness
13 February, 00:49

A firm has a return on equity of 12.4 percent according to the dividend growth model and a return of 18.7 percent according to the capital asset pricing model. The market rate of return is 13.5 percent. What rate should the firm use as the cost of equity when computing the firm's WACC

+3
Answers (1)
  1. 13 February, 01:48
    0
    It would be wise to use the CAPM capital cost.

    Explanation:

    It should use the Capital Assets Pricing Model.

    The market rate is not sufficient. It is included in the CAPM calculation to asses the impact in the firm or industry beta and the free-risk rate.

    The return for the dividend grows model is calculated with the current stock price and expected dividends. We can't know for sure if the stock wasn't undervalued or overrated at the moment of solving for return.

    The CAPM model takes consideration of the current market interest rate, the own non-diversifiable risk of the firm and the fact of a free-risk interest rate. It is the better option
Know the Answer?
Not Sure About the Answer?
Get an answer to your question ✅ “A firm has a return on equity of 12.4 percent according to the dividend growth model and a return of 18.7 percent according to the capital ...” in 📙 Business if there is no answer or all answers are wrong, use a search bar and try to find the answer among similar questions.
Search for Other Answers
You Might be Interested in
The time for the moon to repeat its cycle of phases is equal to
Answers (1)
CIRP. Jason Smith is a foreign exchange trader with Citibank. He notices the following quotes. Spot exchange rate SFr1.6627/$ Six-month forward exchange rate SFr1.6558/$ Six-month $ interest rate 3.5% per year Six-month SFr interest rate 3.
Answers (1)
An insured purchased a 15-year level term life insurance policy with a face amount of $100,000. The policy contained an accidental death rider, offering a double indemnity benefit.
Answers (1)
On February 1, 2021, Strauss-Lombardi issued 9% bonds, dated February 1, with a face amount of $800,000. The bonds sold for $731,364 and mature on January 31, 2041 (20 years). The market yield for bonds of similar risk and maturity was 10%.
Answers (1)
Why do you think it is important to choose the correct Business organization
Answers (1)
New Questions in Business
You manage a portfolio worth $13.8 million, currently all invested in equities, and believe that the market is on the verge of a big but short-lived downturn.
Answers (1)
Assignable causes: A) are not as important as natural causes. B) are within the limits of a control chart. C) depend on the inspector assigned to the job. D) are also referred to as "chance" causes.
Answers (1)
Madison's gross tax liability is $9,000. Madison had $3,000 of tax credits available and she had $8,000 of taxes withheld by her employer. What is Madison's taxes due (or taxes refunded) with her tax return? $0 taxes due and $0 tax refund.
Answers (1)
In perfect competition A. the market demand curve and the individual's demand curve are identical. B. the market demand curve is perfectly inelastic while demand for an individual seller's product is perfectly elastic. C.
Answers (1)
With regard to how people use time and their expectations of how it should be managed, members of which type of culture value efficiency production and fast results?
Answers (1)
Home » Business » A firm has a return on equity of 12.4 percent according to the dividend growth model and a return of 18.7 percent according to the capital asset pricing model. The market rate of return is 13.5 percent.
Sign Up Forgot Password?