Purchase Solution

WACC / beta / required return

Not what you're looking for?

Ask Custom Question

The JBH Corp expects to pay a dividend next year of $2.22. It expects its cash dividends to grow 5% per year forever. JBH has a debt ratio of L = 35%. Its borrowing rate is rd =9%. JBH pays corporate taxes at the rate of 30%, rf = 6%, rm = 12%, and JBH's common stock is currently selling for $20 per share. Answer the below quesitons.
1) what is the current (leveraged) required return, re, on JBH's common stock?
2) What is JBH's WACC?
3) What is JBH's unleveraged required return, r?
4) What unleveraged beta is implied by r?
5) What would you say about the estimates in parts (1) thru (4) if you learned that the market model estimated a (leveraged) beta of 2.2 for JBH's common stock?

Purchase this Solution

Solution Summary

The solution explains how to calculate the WACC, beta and the required return

Solution Preview

1) what is the current (leveraged) required return, re, on JBH's common stock?

The leveraged required return re can be calculated using the constant growth model since the dividends are growing at a constant rate of 5%. Using the constant growth model
re = D1/P0 + g where
D1 = expected dividend = 2.22
P0= current price = $20
g = growth rate = 5%
re = 2.22/20+5% = 16.1%

2) What is JBH's WACC?

WACC = Proportion of debt X after tax cost of ...

Purchase this Solution

Free BrainMass Quizzes
Cost Concepts: Analyzing Costs in Managerial Accounting

This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.

Operations Management

This quiz tests a student's knowledge about Operations Management

Paradigms and Frameworks of Management Research

This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.

Situational Leadership

This quiz will help you better understand Situational Leadership and its theories.

Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.