Unformatted text preview: Therefore, r ps = $11/$100(1  0.05) = $11/$95 = 11.6%. Common equity cost : There are three basic ways of estimating r s : CAPM, DCF, and risk premium over own bonds. None of the methods is very exact. CAPM : We would use r RF = Tbond rate = 10%. For RP M , we would use 4.5% to 5.5%. For beta, we would use a beta in the 1.3 to 1.7 range. Combining these values, we obtain this range of values for r s : Highest: r s = 10% + (5.5)(1.7) = 19.35%. Lowest: r s = 10% + (4.5)(1.3) = 15.85%. Midpoint: r s = 10% + (5.0)(1.5) = 17.50%....
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 Spring '08
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 Finance, Corporate Finance, Debt, Financial Markets, common equity

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