Question: Betas, the Market Risk Premium, and the Equity Cost of Capital: Oracle Corporation (Medium) A risk analyst gives Oracle
Corporation, the enterprise software and database management firm, a CAPM equity beta of 1.20. The risk-free rate is 4.0 percent.
a. Prepare a table with the cost of capital that you would calculate for the equity with the following estimates of the market risk premium:
4.5%
6.0%
7.5%
9.0%
b. Other analysts disagree on the beta, with estimates ranging from 0.90 to 1.40. Prepare a table that gives the cost of capital for each estimate of the market risk premium and beta estimates of0.90 and 1.40.
c. At the end of May 2011, analysts were forecasting earnings of$2.l 7 per share for the fiscal year ending May 31, 2012. They were also forecasting that the P /E ratio would be 20 on May 31 , 2012. The company is expected to pay $0.24 in dividends per share for the fiscal year.
Calculate the current value of the stock in May 2011 for this P/E forecast using the lowest and highest cost of capital estimates from part b.