Cost of Equity – Target Corp.

The cost of equity is the return required by the shareholders. The cost of equity is usually high than most other stocks because they are high-risk investments. This means that it is a high return high-risk investment.
In a diversified portfolio, there is an element of risk that cannot be eliminated and is called systematic measured using the beta coefficient.
Securities with high betas tend to have high returns because the security return is affected by the level of beta. High beta means high risk and consequently high return and vice versa is true.

The beta of the market is 1.0. Securities with betas equal to 1.0 move at the same level as marketable securities. Securities with betas >1.0 fluctuate at a lower rate than market securities while those with <1.0 fluctuate at a lower rate than the market securities.
Target’s beta of 1.1 from indicates that it is a relatively stable stock i.e. moves at a pace slightly above the market securities.
Yield to maturity is the total return of the bond if the bondholder opts not to sell the bond before its maturity. It is the IRR of the bond.
The formula of calculating YTM
YTM= interest + annual price change
(Market price+ coupon price)/2
Where: interest = coupon rate x coupon price
Annual price change = market price – coupon price
Year to maturity
The current yield of 1 year T. bond is 4.2 in October from
The beta of target = 1.1
Risk free rate (1 year government bond) = 4.2
Return of market = risk free rate + risk premium.
Rm= Rf + R premium
=7% + 4.2% = 11.2%
The return equity is calculated using CAMP
CAPM= Rj=Bf (Rm-Rf)
Rm-Pf= 7%
Rf= 4.2%
Rj= 4.2 +1.1(7)
From the above calculation the return of equity (cost) is 11.9%.This shows that the lower the beta the lower the returns of stock.
The risk premium of Target Corp. is 7%. The risk premium is calculated as (RM-RF)
The risk premium is the extra return on the security demanded by the investors over and above the risk-free rate because of investing in risky securities.
Some of the determinants of the beta of a company include the nature of the business that whether the company is a single-sector or a multi-sector company. Single sector companies usually have high betas as compared to multi-sector companies. This is because, in a multi-sector company, losses in one sector are compensated by high profits in another sector that the company has invested in.
The type of business also affects the company’s beta. In companies where customers affect the selling price of the company’s products by for example delaying payments, the betas are usually high.
The level of fixed costs in the cost structure of the company also affects the beta. High percentages of fixed costs in the cost structure of the company lead to high beta. This is called operating leverage. It shows any fluctuation in EBIT due to changes in sales.
The level of debt (financial leverage) in the company’s capital structure is another factor affecting the company’s beta. The interest payments will affect the net income and earning per share if the profits are high or low.
Target Corporation has a debt of $ 12.31B from its most recent quarter. The debt to equity ratio is 0.772 according to its most recent quarter from
The relationship of the equity beta (βE) and the asset beta (βA) is depicted in the following equation.
βE = βA (1+ (1-T) (D/E))
Where βE= equity beta= 1.1
βA assets beta= systematic risk of the operating performance of the company
T = tax rate = 34%
D/E = 0.772 from the most recent quarter
(1+ (1-T) (D/E))
= 1.1
(1+ (1-0.74) (0.772))
= 0.7287
The assets beta is different from the equity beta. This is largely due to the fact that the company has a huge debt in its capital structure.
As seen earlier, it is obvious that the amount of debt in the company’s capital structure affects the beta.
The interest payments will most affect the company’s profits if the profits are declining.
This instability in the profits of the company affects the risk of the company’s stocks.

Don't use plagiarized sources. Get Your Custom Essay on
Cost of Equity – Target Corp.
Just from $13/Page
Order Essay

Goetz Mann N W (2007) An introduction to investment theory Yale School of Management retrieved on 21/11/2007 from

Place your order
(550 words)

Approximate price: $22

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
The price is based on these factors:
Academic level
Number of pages
Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read more

Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.

Read more

Privacy policy

Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

Read more

Fair-cooperation guarantee

By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

Read more

Order your essay today and save 15% with the discount code BANANA