Question

10.18 please give step by step instructions for a & g

What is the firm's cost of equity?

What is the business worth?

Answer 1

The cost of equity is the return that stockholders require for their investment in a company. The traditional formula for cost of equity (COE) is the dividend capitalization model:

Dividends per Share (for neHt year) Cost of Equity Growth Rate t of Dividends Current Market Value of Stock of Dividend

Cost of Equity can be calculated from CAPM model as follow:

Re = r_f + (r_m – r_f) * β

Where:

• Re = the required rate of return on equity
• r_f = the risk free rate
• r_m – r_f = the market risk premium
• β = beta coefficient = unsystematic risk

Business Worth:

Business value definition establishes a standard measure of value used to determine the business worth.

The most common standards of value used in small business valuation are:

• Fair market value
• Investment value
• Intrinsic value

Business value expands concept of value of the firm beyond economic value (also known as economic profit, economic value added, and shareholder value) to include other forms of value such as employee value, customer value, supplier value, channel partner value, alliance partner value, managerial value, and societal value. Many of these forms of value are not directly measured in monetary terms.