A crucial factor in the financial decisions of a company, including the evaluation of capitalinvestment proposals, is the cost of capital. The following information is available for Vertigo Ltd.Current price per share on Stock Exchange Mauritius(SEM)Last year's dividend per shareExpected average annual growth rate of dividendsBeta coefficient for Vertigo LtdIn addition, the following information has been established:Expected rate of return on risk-free securitiesExpected return on the market portfolioRs 2.00Rs 0.1017%0.808%12%a) Critically analyse the CAPM using the market return-based measure of beta for lessliquid stocks and suggest a solution to such problems when estimating beta.b) Vertigo Ltd decides to raise MUR 10 million for a new investment and decides to issueordinary shares. It is expected to pay a constant dividend of MUR 1 at the end of each yearfor five years, after which the dividend is expected to increase at a rate of 10% every year.The required return on equity is 12%. How many ordinary shares would Vertigo Ltd have toissue?

CAPM and Beta: The CAPM uses the risk-free rate, the market risk premium and the Beta to arrive at…

A crucial factor in the financial decisions of a company, including the evaluation of capital investment proposals, is the cost of capital. The following information is available for Vertigo Ltd: Current price per share on Stock Exchange Mauritius (SEM) Last year's dividend per share Expected average annual growth rate of dividends Beta coefficient for Vertigo Ltd In addition, the following information has been established: Expected rate of return on risk-free securities Expected return on the market portfolio Rs 2.00 Rs 0.10 7% 0.80 8% 12% a) Critically analyse the CAPM using the market return-b liquid stocks and suggest a solution to such problems when estimating beta. sed measure of beta for less b) Vertigo Ltd decides to raise MUR 10 million for a new investment and decides to issue ordinary shares. It is expected to pay a constant dividend of MUR 1 at the end of each year for five years, after which the dividend is expected to increase at a rate of 10% every year. The required return on equity is 12%. How many ordinary shares would Vertigo Ltd have to issue?

A crucial factor in the financial decisions of a company, including the evaluation of capital investment proposals, is the cost of capital. The following information is available for Vertigo Ltd: Current price per share on Stock Exchange Mauritius (SEM) Last year's dividend per share Expected average annual growth rate of dividends Beta coefficient for Vertigo Ltd In addition, the following information has been established: Expected rate of return on risk-free securities Expected return on the market portfolio Rs 2.00 Rs 0.10 7% 0.80 8% 12% a) Critically analyse the CAPM using the market return-b liquid stocks and suggest a solution to such problems when estimating beta. sed measure of beta for less b) Vertigo Ltd decides to raise MUR 10 million for a new investment and decides to issue ordinary shares. It is expected to pay a constant dividend of MUR 1 at the end of each year for five years, after which the dividend is expected to increase at a rate of 10% every year. The required return on equity is 12%. How many ordinary shares would Vertigo Ltd have to issue?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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An investor with a required return of 15 percent for very risky investments in common stock has analyzed three firms and must decide which, if any, to purchase. The information is as follows: Firm A B C Current earnings $ 2.40 $ 3.20 $ 7.50 Current dividend $ 0.90 $ 3.80 $ 6.90 Expected annual growth rate in 5 % 1 % -1 % dividends and earnings Current market price $ 16 $ 31 $ 49 What is the maximum price that the investor should pay for each stock based on the dividend-growth model? Round your answers to the nearest cent. Stock A: $ Stock B: $ Stock C: $ If the investor does buy stock A, what is the implied percentage return? Round your answer to two decimal places. % If the appropriate P/E ratio is 12, what is the maximum price the investor should pay for each stock? Round your answers to the nearest cent. Stock A: $ Stock B: $ Stock C: $ If the appropriate P/E ratio is 4, what is the maximum…
Integrative Risk and valuation Giant Enterprises' stock has a required return of 13.9%. The company, which plans to pay a dividend of $2.01 per share in the coming year, anticipates that its future dividends will increase at an annual rate consistent with that experienced over 2013-2019 period, when the following dividends were paid: a. If the risk-free rate is 3%, what is the risk premium on Giant's stock? b. Using the constant-growth model, estimate the value of Giant's stock. (Hint: Round the computed dividend growth rate to the nearest whole percent.) c. Explain what effect, if any, a decrease in the risk premium would have on the value of Giant's stock. a. If the risk-free rate is 3%, the risk premium on Giant's stock is %. (Round to one decimal place.)
The share price of a company is shs100. Its expected next dividend is shs3. The dividend and share price growth rate is expected to be 4% p.a. The risk-free interest rate is 5% p.a. The share has a beta of 0.8 and the expected yield on the stock market as a whole is 8% p.a. Use the Gordon Growth Model and the Security Market Line to form an opinion as to whether the share is correctly priced.
Quantitative Problem: Barton Industries estimates its cost of common equity by using three approaches: the CAPM, the bond-yield-plus-risk-premium approach, and the DCF model. Barton expects next year's annual dividend, D1, to be $2.40 and it expects dividends to grow at a constant rate gL = 5.3%. The firm's current common stock price, Po, is $26.00. The current risk-free rate, TRF, = 4.6%; the market risk premium, RPM, = 5.9%, and the firm's stock has a current beta, b, = 1.1. Assume that the firm's cost of debt, rd, is 8.91%. The firm uses a 3.9% risk premium when arriving at a ballpark estimate of its cost of equity using the bond-yield-plus-risk-premium approach. What is the firm's cost of equity using each of these three approaches? Do not round intermediate calculations. Round your answers to two decimal places. CAPM cost of equity: Bond-Yield-Plus-Risk-Premium: DCF cost of equity: % % % If you are equally confident of all three methods, then what is the best estimate of the…
An investor with a required return of 15 percent for very risky investments in common stock has analyzed three firms and must decide which, if any, to purchase. The information is as follows: Firm A B C Current earnings $ 1.60 $ 3.20 $ 6.80 Current dividend $ 2.10 $ 2.50 $ 6.40 Expected annual growth rate in 5 % 2 % -3 % dividends and earnings Current market price $ 24 $ 23 $ 41 What is the maximum price that the investor should pay for each stock based on the dividend-growth model? Round your answers to the nearest cent. Stock A: $ Stock B: $ Stock C: $ If the investor does buy stock A, what is the implied percentage return? Round your answer to two decimal places. % If the appropriate P/E ratio is 17, what is the maximum price the investor should pay for each stock? Round your answers to the nearest cent. Stock A: $ Stock B: $ Stock C: $ If the appropriate P/E ratio is 5, what is the maximum…
For this question, use the American Eagle Outfitters 2016 10Ks and 2017 Q1 10Q from the previous questions. Your Managing Director asks you to include valuations based on Comparable Forward PE multiples given that peer capital structures have been relatively similar. She asks you to assume a 14x PE multiple on forward diluted EPS, and a 10% growth rate over LTM diluted EPS to calculate forward EPS, which is being assumed by industry analysts. Using the aforementioned assumptions for Comparable Transactions’ PE multiples, what is the implied AEO share price based on the latest data provided to you from its Corporate filings as of June 2017? 15.12 16.63 16.79 17.86
Q3. If EBIT in Year 1 is 6.5M (instead of 11.5M, in the attached screenshot), but all other assumptions are the same, what is the internal rate of return to: (i) Senior Debt Investors; (ii) Mezzanine Debt Investors; (iii) Equity Investors?
The analysis of risk and the search for yield in companies is determinant for financial success. In this case, consider the stock price and dividends of the companies Power Electric Industries, Riviera Power Inc. and Nature Energy Corp. for the period from 2014 to 2019. Power Electric Industries Power Electric Industries Riviera Power Inc. Riviera Power Inc. Nature Energy Corp. Nature Energy Corp. year Year Stock price Dividends Year Stock price Dividends Year Stock price Dividends 2019 $18.5 $1.50 $38.5 $4.50 $58.5 $3.50 2018 $15.93 $1.10 $40.93 $3.10 $50.93 $2.10 2017 $10.20 $1.00 $43.20 $3.00 $53.20 $3.00 2016 $9.80 $0.90 $50.80 $2.90 $50.80 $2.90 2015 $8.50 $0.85 $48.50 $2.85 $48.50 $2.75 2014 $8.00 $0.80 $45.00 $2.80 $45.00 $2.60 1. Consider the companies' data to calculate annual rates of return. Determine the average return for each figure over the 5-year period. (You…
The following questions are based on a stock and its derivatives. Relevant information is listed in the Table below. Fundamental information Number of shares outstanding Debt-to-capital ratio Current dividend Retention ratio Current free cash flow to the firm (FCFF) Market information Market value of debt Tax rate Estimations of equity analysts Long-term growth of FCFF Short-term return on equity (ROE) for the first 2 years Long-term return on equity (ROE) Required return of debt Required return of equity 50,000 25% £1 40% £60,000 £2,000,000 30% 10% 30% 20% 5% 15% (b) Another equity analyst applies the FCFF model to evaluate the stock price. Show his price determination.
Integrative-Risk and valuation Giant Enterprises' stock has a required return of 14.2%. The company, which plans to pay a dividend of $1.84 per share in the coming year, anticipates that its future dividends will increase at an annual rate consistent with that experienced over 2013-2019 period, when the following dividends were paid: E. a. If the risk-free rate is 6%, what is the risk premium on Giant's stock? b. Using the constant-growth model, estimate the value of Giant's stock. (Hint: Round the computed dividend growth rate to the nearest whole percent.) c. Explain what effect, if any, a decrease in the risk premium would have on the value of Giant's stock. a. If the risk-free rate is 6%, the risk premium on Giant's stock is %. (Round to one decimal place.) b. Using the constant-growth model, the value of Giant's stock is $ . (Round to the nearest cent.) c. Explain what effect, if any, a decrease in the risk premium would have on the value of Giant's stock. (Select from the…
USE EXCEL and show cell references.
Suppose the risk-free rate is 2.61% and an analyst assumes a market risk premium of 6.65%. Firm A just paid a dividend of $1.19 per share. The analyst estimates the ẞ of Firm A to be 1.31 and estimates the dividend growth rate to be 4.79% forever. Firm A has 288.00 million shares outstanding. Firm B just paid a dividend of $1.89 per share. The analyst estimates the ẞ of Firm B to be 0.87 and believes that dividends will grow at 2.28% forever. Firm B has 196.00 million shares outstanding. What is the value of Firm B? Submit Answer format: Currency: Round to: 2 decimal places. Show Hint

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