The available options are:
A. 25% Stocks / 25% Bonds / 25% REITs / 25% Money Markets
B. 50% Stocks / 40% Bonds/ 10% Cash
C. 100% Bonds
D. 100% Stocks
Answer:
B. 50% Stocks / 40% Bonds/ 10% Cash
Explanation:
Since the age of the customer is not given in the question, however, given he or she is 25 years from retirement, it is logical to assume that the customer is about 40-50 years old in age. According to the rule of thumb that "100% minus the customer's age" should be allocated to stocks for growth, hence, a stock allocation of 40-50% is about right.
Hence, in this case, the right answer is Option B: 50% Stocks / 40% Bonds/ 10% Cash
Canon was able to redesign the copying machine so that it didn't need professional service—reliability was built directly into the machine, and the user could replace parts, such as the cartridge. What Xerox had not envisioned was the possibility that the components of the copying machine could be put together in an altogether different way that was more user-friendly. This example describes
Answer:
architectural innovation
Explanation:
The scenario is describing the term known as architectural innovation. This refers to the innovation of the specific architecture of any product that changes and/or modifies the way the different components of the machine link or relate to each other, thus allowing it to perform new functions or the same functions but in a much more user-friendly manner. This is what Canon did by changing the architecture of the copying machine so that it was more user-friendly for the end consumer.
The decision to take less salary in a year when the company was less profitable and employees' pay was cut is an example of Nishimatsu's:
Answer: commitment
Explanation:
The Chief Executive Officer of Japan Airlines, who was Haruka Nishimatsu, was an example of a strategic leader who had a high performance.
The The decision to take less salary in a year when the company was less profitable and employees' pay was cut is an example of Nishimatsu commitment to the company.
Which of the following will happen when the economy makes the transition from its short-run equilibrium to its long-run equilibrium? (Note: Do not adjust the graphs to reflect the transition to the long run.) Check all that apply.
A. The price level will fall.
B. The demand for money will fall.
C. The equilibrium interest rate will rise.
Answer:
C. The equilibrium interest rate will rise.
Explanation:
According to the question, When the economy made the transition from the short run equilibrium to the long run equilibrium than there is a rise in the supply that results in rise in the nominal wages but the real wage would remain unchanged or constant
Therefore the option c is correct and the rest of the options are wrong
Answer:
C. The equilibrium interest rate will rise.
Explanation:
Nominal wages, prices, and perceptions adjust upward to this new price level.
On January 1, a company issues bonds dated January 1 with a par value of $320,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 6% and the bonds are sold for $333,650. The journal entry to record the first interest payment using the effective interest method of amortization is: (Rounded to the nearest dollar.)
Answer: Debit interest expense $10,010, debit premium on bonds payable $1,190, credit cash $11,200.
Explanation:
Given the following :
Par value = $320,000
Bonds payable = $333,650
Market rate = 6% compounded semianually
Contract rate = 7%
Cash credited :
Par value * contract rate = $320,000 * 0.07 * 0.5 = $11,200
Interest Expense :
Bonds payable * market rate * 0.5
$333,650 * 0.06 * 0.5 = $10,009.5 (debit)
= $10,010 ( nearest dollar)
Discount Premium on bonds :
Cash - interest expense
$11200 - $10010 = $1,190
The two fundamental sources of marketing research problems are a. ineffective advertising and change. b. poor sales and ineffective advertising. c. planned change and unplanned change. d. technological advancement and customer suggestions.
Answer:
Option c (planned change and unplanned change) is the correct choice.
Explanation:
Marketing research seems to be the sequential as well as analytical assessment, compilation, review, and distribution of knowledge about marketing performance and customer concerns with the specific goal of helping executives in decision-making related to recognizing and solving advertising major challenges.The challenge regarding marketing research seems to be the assessment of Retailers' advantages and disadvantages. Vis-a-vis certain main competitors as regards factors affecting the profitability including its shop.3 other alternatives aren't relevant to the subject. So that the option here is just the appropriate one.
Define Networking
Explain types of Network
Explain topologies
Answer: Network topology is the way a network is arranged , including the physical or logical description of how links and nodes are set up to relate to each other. There are numerous ways a networks can be arranged , all with different pros and cons and some are more useful in certain circumstances than others. hope you understand
Explanation:
The following information is available for Sheridan Company:
Sales $670000
Total fixed expenses $150000
Cost of goods sold 470000
Total variable expenses 420000
A CVP income statement would report:_______
a. Gross profit of $160,000
b. contribution margin of $400,000
c. gross profit of $190,000
d. contribution margin of $190,000
Answer:
The answer is $250,000
Explanation:
NOTE: The answer to the question is not among the options.
Contribution margin in Cost-Volume-Profit (CVP) is sales minus variable cost.
Sales - $670,000
Total variable expenses $420,000
Therefore in CVP income statement, contribution margin is:
$670,000 - $420,000
= $250,000.
Gross profit is can never be calculated in CVP income statement
Which of the following statements is CORRECT? a. The specific risk premium used in the CAPM is the same as the risk premium used in the bond-yield-plus-risk-premium approach. b. Beta measures market risk, which is, theoretically, the most relevant risk measure for a publicly-owned firm that seeks to maximize its intrinsic value. This is true even if not all of the firm's stockholders are well diversified. c. An advantage shared by both the DCF and CAPM methods when they are used to estimate the cost of equity is that they are both "objective" as opposed to "subjective," hence little or no judgment is required. d. The discounted cash flow method of estimating the cost of equity cannot be used unless the growth rate, g, is expected to be constant forever. e. If the calculated beta underestimates the firm's true investment risk—i.e., if the forward-looking beta that investors think exists exceeds the historical beta—then the CAPM method based on the historical beta will produce an estimate of rs and thus WACC that is too high.
Answer:
Correct Answer:
b. Beta measures market risk, which is, theoretically, the most relevant risk measure for a publicly-owned firm that seeks to maximize its intrinsic value. This is true even if not all of the firm's stockholders are well diversified.
Explanation:
In the Options given above, the only one that is TRUE is Option B which is about a Beta measures market risk found in a publicly-owned firm.
For a monopolist that is maximizing profits Question 2 options: A) marginal revenue exceeds price. B) price equals average total cost. C) price exceeds marginal cost. D) price equals marginal revenue.
Answer:
C) price exceeds marginal cost.
Explanation:
A monopoly is when there is only one firm operating in an industry. there is usually high barriers to entry of firms. the demand curve is downward sloping. it sets the price for its goods and services.
An example of a monopoly is an utility company
Because the demand curve is downward sloping, marginal revenue is less than price. As prices fall, more units of the product is bought.
Silca Electronics Inc. is a consumer-electronics company based in the country of Pelo. It has approximately 300 stores across the country and is already active in three foreign countries. It attempts to establish itself successfully in the country of Zevar, and uses its low-cost strategy to do so. However, due to the additional costs associated with training, coordinating across geographic distances, and other costs associated with doing business in an unfamiliar cultural and economic environment, Silca Electronics Inc. incurs huge financial losses in Zevar. In this scenario, Silca Electronics Inc.'s failure to establish itself successfully in Zevar occurs most likely because:
Answer:
It under-estimated its cost and liabilities in expanding to Zevar market
Explanation:
The pricing strategy adopted by Silca is low cost , which is the practice of stimulating demand and gaining market share through setting a lower price with the benefit of higher profit per sale , which is made possible as a result of lower cost of production.
However , the processes involved in expansion to Zevar attracted additional costs which violated the the lower cost principle, as the cost of operation became higher than would have been , leading to a financial loss.
It is apparent here that Silca did not do its due diligence properly before going ahead with the expansion move as cost and liabilities appeared to have been under estimated.
Budget performance report for a cost center GHT Tech Inc. sells electronics over the Internet. The Consumer Products Division is organized as a cost center. The budget for the Consumer Products Division for the month ended January 31 is as follows: Customer service salaries $546,840 Insurance and property taxes 114,660 Distribution salaries 872,340 Marketing salaries 1,028,370 Engineer salaries 836,850 Warehouse wages 586,110 Equipment depreciation 183,792 Total $4,168,962 During January, the costs incurred in the Consumer Products Division were as follows: Customer service salaries $602,350 Insurance and property taxes 110,240 Distribution salaries 861,200 Marketing salaries 1,085,230 Engineer salaries 820,008 Warehouse wages 562,632 Equipment depreciation 183,610 Total $4,225,270
1. Prepare a budget performance report for the director of the Consumer Products Division for the month of January. If an amount box does not require an entry, leave it blank GHT Tech Inc. Budget Performance Report-Director, Consumer Products Division For the Month Ended January 31 Actual Budget Over Budget Under Budget Customer service salaries $ Insurance and property taxes Distribution salaries Marketing salaries Engineer salaries Warehouse wages Equipment depreciation Total
2. For which costs might the director be expected to request supplemental reports?
1. Customer service salaries and marketing salaries as they are significantly over budget.
2. Customer service salaries, warehouse wages and marketing salaries as they have significantly changed.
3. Engineering salaries and warehouse wages as they are significantly under budget.
Answer:
A.Actual $4,225,270
Budget $ 4,168,962
Over budget $112,370
Under budget $56,062
B. The director be expected to request supplemental request for Customer service salaries, warehouse wages and marketing salaries as they have significantly changed.
Explanation:
Preparation of the budget performance report for the director of the Consumer Products Division for the month of January.
GHT Tech Inc.
Budget Performance Report for Director, Consumer Products Division For the month ended January 31
Actual Budget Over budget Under budget
Customer Service Salaries $ 602,350 $ 546,840 $ 55,510 Over budget
Insurance and Property Taxes
110,240 114,660 $ 4,420 Under budget
Distribution Salaries 861,200 872,340 11,140 Under budget
Marketing Salaries 1,085,230 1,028,370 56,860 Over budget
Engineer Salaries 820,008 836,850 16,842 Under budget
Warehouse Wages 562,632 586,110 23,478 Under budget
Equipment Depreciation 183,610 183,792 182 Under budget
Totals
Actual $4,225,270
Budget $ 4,168,962
Over budget $112,370
Under budget $56,062
2. The director be expected to request supplemental reports for Customer service salaries, warehouse wages and marketing salaries as they have significantly changed.
An entrepreneur establishes a social justice online retail company. The company purchases authentic artwork, jewelry and crafts at a fair price from artisans in developing countries and then sells them through a website. As a company following a differentiation strategy, which of these functional-level strategies will be important for sustaining the business?a. Developing a robust marketing program to promote the social justice elements of the business and gain insights into consumer purchasing behavior on the websiteb. Leveraging its purchasing power to pressure artisans into selling their goods at a reduced pricec. Adopting a lean manufacturing technique to reduce production costsd. Incentivizing employees with bonuses for cutting costs within the operation
Answer:
a. Developing a robust marketing program to promote the social justice elements of the business and gain insights into consumer purchasing behavior on the website
Explanation:
In order to sustain the business, the entrepreneur should create a robust marketing program in which he is able to promote the components of social justice and also the behavior of the consumer on the website so that he gets to know how much people are active in his website, what are the problem people are facing, etc
Hence, the correct option is a
The Securities and Exchange Commission: Multiple Choice verifies the accuracy of the information contained in the prospectus. publishes red herrings on prospective new security offerings. examines the prospectus during the Green Shoe period. reviews registration statements to ensure they comply with current laws and regulations. determines the final offer price once they have approved the registration statement. Next Visit question mapQuestion 24 of 25 Total24 of 25 Prev
Answer:
reviews registration statements to ensure they comply with current laws and regulations.
Explanation:
The Securities and Exchange Commission (SEC) is a governmental agency saddled with the sole responsibility of regulating the securities or capital markets, as well as protecting investors in a country.
In the United States of America, the Securities and Exchange Commission (SEC) as an independent government agency was established under the Securities Act of 1933 and the Securities and Exchange Act of 1934 of the United States of America. It has the power to propose securities rules and regulations, and enforce federal securities law in the securities market.
Hence, Securities and Exchange Commission reviews registration statements of bond issuers, investment advisers etc, to ensure they comply with current laws and regulations.
A project manager has just found out that a major subcontractor for her project is consistently late delivering work. The project team member responsible for this part of the project does not get along with the subcontractor. To resolve the problem, the project manager says, "You both will have to give up something to solve this problern," What conflict resolution method is she using
Answer:
compromise
Explanation:
Compromise as a conflict resolution strategy is one that involves finding acceptable reasons such that all the parties involved in the conflict have their concerns satisfied partly.
The project manager saying "You both will have to give up something to solve this problem" means that both parties involved in the conflict will have to come to an agreement that suits or benefits both parties.
Cheers.
what is diminishing return law???
Answer:
Numerous different factors are presumed constant by the law. An additional description is given below.
Explanation:
In psychology, a definition that unless certain input factor becomes continued to increase whereas some considerations (hardware as well as a conference room) are kept constant, the outcome per unit including its dependent variable will inevitably decrease.This law specifically states that such an increased amount of some kind of single manufacturer component would result in a decrease in gross profit efficiency.The law of diminishing return is that marginal return states that, at some point that adding an additional factor of the production results in smaller increases in the output.
Hope this helps!
only a monopolistically competitive firm operates at its efficient scale. both a perfectly competitive firm and a monopolistically competitive firm operate at their efficient scale of production. neither a competitive firm nor a monopolistically competitive firm charges a markup over marginal cost. only a perfectly competitive firm operates at its efficient scale.
Answer:
Correct Answer:
only a monopolistically competitive firm operates at its efficient scale.
Explanation:
In a given market, a given organization or firm could operate either in a monpolistically competitive or perfectively competitive at its efficient scale. However, in the long run, only a monopolistically competitive firm operates at its efficient scale.
Claire Nevsky is in charge of advertising for her company and has produced a 30-second television spot to promote one of the company's new products. One of her assistants just out of college believes that the commercial has too much visual and audio information packed into such a small amount of time. The assistant is specifically concerned about limits in the receiver's
Answer:
Channel capacity
Explanation:
The channel capacity is the rate in which the data and information could be converted through a channel of communication
Here, in the given question as it is mentioned that the commercial includes more visual and audio information that to be converted into a less amount of time so this determines the channel capacity for the limits
"A client surrenders a variable annuity contract 5 years after purchase because of poor performance. The customer invested $50,000 and redeemed it when the NAV was $40,000, however the customer only received $37,000 because a $3,000 surrender fee was imposed. The tax consequence is:"
Answer: D. $10,000 deductible ordinary loss and $3,000 non-deductible loss
Explanation:
Should a person surrender a variable annuity early, their cost basis will be the amount they invested to get the annuity and the redemption amount will be considered as sales proceeds. If the sales proceeds are less than the cost basis, this is a loss and will be treated as a deductible ordinary loss.
The surrender fee will not however be treated as an deductible loss meaning that in this case $3,000 would be a non-deductible loss and $10,000 would be a deductible ordinary loss.
Jarden Company has credit sales of $3,600,000 for year 2017. On December 31, 2017, the company’s Allowance for Doubtful Accounts has an unadjusted credit balance of $14,500. Jarden prepares a schedule of its December 31, 2017, accounts receivable by age. On the basis of past experience, it estimates the percent of receivables in each age category that will become uncollectible. This information is summarized here. December 31, 2017 Accounts Receivable Age of Accounts Receivable Expected Percent Uncollectible $ 830,000 Not yet due 1.25 % 254,000 1 to 30 days past due 2.00 86,000 31 to 60 days past due 6.50 38,000 61 to 90 days past due 32.75 12,000 Over 90 days past due 68.00 Problem 7-3A Part 1 Required: 1. Estimate the required balance of the Allowance for Doubtful Accounts at December 31, 2017, using the aging of accounts receivable method.
Answer:
$41,650
Explanation:
The computation of Estimate the required balance of the Allowance for Doubtful Accounts is shown below:-
Particulars Account receivable % Estimated uncollectible
Not yet due $830,000 1.25% $10,375
1 to 30 days $254,000 2% $5,080
31 to 60 days $86,000 6.50% $5,590
61 to 90 days $38,000 32.75% $12,445
Over 90 days $12,000 68.00% $8,160
Estimated balance $41,650
Physical units to be accounted equals A : units started into production plus units in ending work in process inventory. B : units started into production plus units in beginning work in process inventory. C : units started into production less units in beginning work in process inventory. D : units completed and transferred out plus beginning work in process inventory.
Answer:
B : units started into production plus units in beginning work in process inventory.
Explanation:
If a Company uses process costing, the units to be accounted for are the units that were in production during the period.
Units in production comprises of units in beginning work in process still to be completed as a result of previous process plus the units started into production during the period.
Blake racked up three safety violations in one month and was taken off the construction crew and put in the office, meaning he was no longer eligible for overtime. He pled with his boss, saying he needed the money for rent. Citing that Blake's financial situation was not a concern of the company, he was put in the office until he could demonstrate that safety was a priority. This illustrates
Answer:
Punishment.
Explanation:
In this scenario, Blake racked up three safety violations in one month and was taken off the construction crew and put in the office, meaning he was no longer eligible for overtime. He pled with his boss, saying he needed the money for rent. Citing that Blake's financial situation was not a concern of the company, he was put in the office until he could demonstrate that safety was a priority. This illustrates punishment.
Punishment can be defined as an act of imposing a penalty or consequences on an individual or group of people for flouting rules, guidelines or instructions and any other wrongdoing.
Generally, punishments are used as a moral tool to discourage wrongdoing or unacceptable behaviors being exhibited by people and to serve as a deterrent to others.
Given that he had violated three safety precautions in just one month, the managers action of removing him from the construction site illustrates punishment.
This is an example of positive punishment in the workplace. Punishment is a way of disapproving of certain work behaviors that are unacceptable.
Safety in the workplace is a matter of grave concern. From this punishment that he is made to receive, he would be more safety conscious when he is allowed to join the crew.
The manager's action was very necessary to avoid negative workplace incidents.
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Predictive analytics is used for all of the following exceptâ:
a. establishing consumer credit scores.
b. forecasting driver safety.
c. identifying the most profitable customers.
d. anticipating customer response to price changes.
e. determining the best routes for product delivery. .
Answer: determining the best routes for product delivery.
Explanation:
Predictive analytics is designed I order to help determine the effects of changes that occurs in a business environment.
It can be used for establishing consumer credit scores, forecasting the safety of drivers, identifying the most profitable customers and also anticipating customer response to price changes.
It is not used for determining the best routes for product delivery.
Andy Seagroves purchased a computer from Best Buy. Best Buy did not disclose to him that the computer was a return item. There was no indication of any price difference between the computer Andy bought and the unopenedcomputers. Andy experiences significant difficulties with the computer and returns it to Best Buy. Andy indicates that he would like to have a new computer and that the price is now $150 more. Best Buy indicates that it is happy to take the return on the computer and credit Andy's account, but that it has no further liability.
a. Best Buy's position is correct.
b. Andy has no damages since Best Buy took back the computer.
c. Andy is entitled to recover the price difference so that he can replace the computer.
d. Andy is entitled to the return, but noadditional damages.
e. none of the above
Answer: c. Andy is entitled to recover the price difference so that he can replace the computer.
Explanation:
Most times when selling gadget integrity should be a watch word for many sellers. Selling a gadget knowing very well it has fault and not disclosing it to the buyer is a big offense that can and should be filed for a law suit if terms wanted are not met. Due to the damages that Andy got on the gadget on buying it, he is entitled to being paid the recovery price difference to get another laptop.
Malcolm Lewis has come up with the idea of a system for picking up people's cars while they are at work, washing and waxing them, and returning them for a fee. Having been a big success in his home city, Malcolm plans to expand his operation into other cities. The service described here seems best suited to
Answer:
Franchising
Explanation:
Franchising is a strategy that companies use to expand their business in which one party called the franchisee pays the other party the franchisor a specific amount of money to have access to the company's processes, knowledge and brand to sell the product or service in a specific place using the name of the company. This would be the best suited strategy for this service because the company can expand without having to get a big amount of capital using the resources of other people and this can allow to grow faster and the franchisee can have a better knowledge of the specific market.
what is the best business organization for annabeth’s new company?
a corporation, because she will need financing to get started.
a sole proprietorship, because the business is small and simple to operate.
a partnership, because she lacks the skills to make machine parts
a cooperative, because local businesses will be her customers.
Answer: A Corporation, because she will need financing to get started.
Explanation:
As Annabeth would like to buy a factory to begin making the parts, she would would need a huge cash outlay to get started. By starting a Corporation, she can raise cash easier from the shareholders as well as utilize the knowledge and expertise of others who will join the company to help her in areas she might not be well versed in such as in Accounting or business administration.
Another reason a Corporation would be better is because of the realization of her longer term plans. A Corporation is more likely to expand in the the future which will enable Annabeth realize her dreams of selling to Europe and South America. Indeed, she has a better chance of achieving that sooner rather than later.
Answer: A)
Explanation:
On May 10, 2017, Vaughn Co. enters into a contract to deliver a product to Greig Inc. on June 15, 2017. Greig agrees to pay the full contract price of $1,990 on July 15, 2017. The cost of the goods is $1,310. Vaughn delivers the product to Greig on June 15, 2017, and receives payment on July 15, 2017. Prepare the journal entries for Vaughn related to this contract. Either party may terminate the contract without compensation until one of the parties performs.
Answer:
June 15, 2017, goods sold on account to Greig
Dr Accounts receivable 1,990
Cr Sales revenue 1,990
Dr Cost of goods sold 1,310
Cr Merchandise inventory 1,310
July 15, 2017, payment collected from Greig
Dr Cash 1,990
Cr Accounts receivable 1,990
The transaction must be recorded only after some type of consideration is exchanged between the parties.
Data for Shelby Company for the current year is as follows: Sales Revenue $10,000 Cost of Goods Sold: Beginning Merchandise Inventory $3,000 Net Cost of Purchases 7,000 Cost of Goods Available for Sale 10,000 Less: Ending Merchandise Inventory 2,000 Cost of Goods Sold 8,000 Gross Profit $2,000 Assume that the ending Merchandise Inventory was accidentally overstated by $500. What are the correct amounts for Cost of Goods Sold and Gross Profit?
Answer:
$8,500 and $1,500
Explanation:
The computation of the corrected amount for the cost of goods sold and the gross profit is shown below:
Since the ending inventory is overstated by $500 that means it is extra added so we deduct this amount from the ending inventory i.e
= $2,000 - $500
= $1,500
Now the cost of goods sold is
= Sales revenue - ending inventory
= $10,000 - $1,500
= $8,500
And, as we know that
Gross profit = Sales revenue - the cost of goods sold
= $10,000 - $8,500
= $1,500
If a typical U.S. company correctly estimates its WACC at a given point in time and then uses that same cost of capital to evaluate all projects for the next 10 years, then the firm will most likely
Available Options Are:
A. Become riskier over time, but its intrinsic value will be maximized.
B. Become less risky over time, and this will maximize its intrinsic value.
C. Accept too many low-risk projects and too few high-risk projects.
D. Become more risky and also have an increasing WACC. Its intrinsic value will not be maximized.
E. Continue as before, because there is no reason to expect its risk position or value to change over time as a result of its use of a single cost of capital.
Answer:
Option D. Become more risky and also have an increasing WACC. Its intrinsic value will not be maximized.
Explanation:
The reason is that different projects require different level of funding. If we are not increasing Debt and Equity at the same proportion for funding all the projects then we are actually increasing our WACC which means that the acceptability of the projects will not be appropriate here. The risk profile of all individual projects also matter because we use Ke cost of equity to calculate the WACC, which is calculated using the CAPM formula. And Beta Asset is the risk of the individual project industry which is used in the CAPM formula. All this increases the WACC which shows that the risk profile of the company has grown upwards.
Furthermore, if the WACC is higher then the intrinsic value of the projects can not be maximized and that's the reason why most firms try to have optimal level of capital structure (Percentage of equity and debt that gives lowest WACC).
Hence the option D is correct.
"A customer contributed $20,000 to a variable annuity contract. The account value has grown over the years and the NAV is now $35,000. The customer is now age 60, and takes a lump-sum distribution of $20,000 to pay for expenses. Which statement is TRUE?"
Answer: C. $15,000 of the distribution is taxable and $5,000 is not taxable
Explanation:
The options to the question are:
A The entire $20,000 distribution is not taxable
B $5,000 of the distribution is taxable and $15,000 is not taxable
C $15,000 of the distribution is taxable and $5,000 is not taxable
D The entire $20,000 distribution is taxable
It should be noted that variable annuity contributions are typically not tax-deductible. Since the customer contributed $20,000 to a variable annuity contract and the account value has grown over the years and the NAV is now $35,000; when the customer takes a lump-sum distribution of $20,000. From the $20,000, $15,000 of the distribution is taxable and $5,000 is not taxable.
Bunkhouse Electronics is a recently incorporated firm that makes electronic entertainment systems. Its earnings and dividends have been growing at a rate of 30%, and the current dividend yield is 2%. Its beta is 1.2, the market risk premium is 8%, and the risk-free rate is 4%. (LO13-4) a. Use the CAPM to estimate the firm’s cost of equity. b. Now use the constant growth model to estimate the cost of equity. c. Which of the two estimates is more reasonable?
Answer:
a. 13.60 %
b. 10.00 %
c. CAPM accounts for investment risk and can be applied by any company irregardless of dividend size or growth rate.
Explanation:
Cost of Equity is the return required by holders of Common Stock
1. CAPM
Cost of Equity = Expected Return on Risk Free Security + Company`s Beta × Market Risk Premium
= 0.04 + 1.20 × 0.08
= 13.60 %
2. Constant growth model
Cost of Equity = Current Dividend Yield + Expected Growth
= 2 % + 8 %
= 10.00 %
