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The firm has 7,000,000 shares of common equity outstanding which currently trade on the NYSE for $43.50 per share. The beta of the stock is 1.3. The prevailing risk free rate is 4.2%, and the required return on the firm's equity is 16%.

1. What is the market value of the equity?

2. What is the Cost of Equity (assuming no float costs)?

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Solution Summary

Provides steps necessary to calculate market value of equity and cost of equity.

Solution provided by:
Sonia Agarwal, CA
Education
  • Chartered Accountant (Equivalent to CPA in US), Institute of Charted Accountants of India
  • Bachelor of Commerce, West Bengal University
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  • "I got this feedback and I wanted to know if you can explain it to me. I noticed something within your workings which I believe is incorrect.  It looks like you've mistaken the Debt ratio for the Equity Multiplier.  You've done a calculation to determine Return on Equity (ROE) but if you take a look at the ratios provided for us you'll see ROE listed on the bottom line already.  You can use ROE, Profit Margin and Total Asset Turnover to figure out the Equity Multiplier amount.  Equity multiplier is not provided for us and we need to calculate it.  I really hope this is helpful to you.  "
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