Question

A risk analyst gives Oracle Corporation, the enterprise software and database management firm, a CAPM equity beta of 1.2. As of May 2011, the risk free rate is 4.0 percent, the market risk premium is 6%, the analyst is forecasting for Oracle to have EPS of $2.17 per share and P/E ratio to be 20, for the fiscal year ending May 31, 2012. The company is expected to pay $0.24 in dividends per share for the fiscal year.

The equity cost of capital for Oracle is:__________The value per share of equity for Oracle in May 2011 is:________

Answer 1

Cost of equity = 11.20%, Value of Equity = $39.25

Step-by-step explanation:

a. Cost of equity = Rf + B(Rm-Rf)

Cost of equity = 4% + 1.2(6%)

Cost of equity = 4% + 7.20%

Cost of equity = 11.20%

b. P/E ratio = 20

Market Price / EPS = 20

Market Price = EPS * 20

-->P1 = $2.17 * 20 = $43.40

DPS1= $0.24

Value of Equity = P1/Cost of Equity + DPS1/Cost of equity

Value of Equity = $43.40/1.1120 + $0.24/1.1120

Value of Equity = $39.03 + $0.22

Value of Equity = $39.25