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Firm and Equity Valuation Through Required Returns
The weighted average cost of capital of ABC Corp based on market values is 15.6% while its cost of ordinary shares is 21.0%. It has a long-term debt to equity ratio of 150%. The expected total dividends for the year is P3,400,000 and the growth rate of the share value is 4%.
Compute for the:
1.Equity value
2. Firm value
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- QUESTION EIGHTA firm has Sh. 4 million of 7.5 % interest rate debt. Its expected EBIT is Sh. 0.9 million and WACC is 10 %. Using the Net Operating Income approach;(i) Calculate the value of the firm(ii) Calculate the cost of capital for the firmQUESTION NINEConsider two firms L and U which are identical in all aspects except for capital structure. The EBIT and cost of capital for each firm is Sh. 900,000 and 10% respectively. U is an all-equity financed firm while L has 7.5% of Sh.4, 000,000 debt.a. Estimate the value of levered firm (L) and Unlevered firm (U) using Net Income (NI) approach;b. Establish whether there is an arbitrage opportunityc. Estimate the arbitrage profits if any by considering an investor who holds 10% of the stock ofEstimate your firm’s Weighted Average Cost of Capital. Assume that the current risk-free rate of interest is 3.5%, the market risk premium is 5%, and the corporate tax rate is 21%. Ø Debt: • Total book value: $10 million • Total market value: $12 million • Coupon rate: 6% • Yield to Maturity: 5% Ø Common Stock: • Total book value: $15 million • Total market value: $20 million • Beta = 1.1 Ø Preferred Stock: • Total book value: $2 million • Total market value: $2.5 million • Price per share: $20 • Dividend per share: $1.50 What is your firm’s Weighted Average Cost of Capital (input as a raw number, i.e. if your answer is 7.1%, input 7.1)?Dorpac Corporation has a dividend yield of 1.6%. Its equity cost of capital is 7.1%, and its dividends are expected to grow at a constant rate. a. What is the expected growth rate of Dorpac's dividends? b. What is the expected growth rate of Dorpac's share price? a. What is the expected growth rate of Dorpac's dividends? The growth rate will be _____ %. (Round to one decimal place.) Part 2 b. What is the expected growth rate of Dorpac's share price? What is the expected growth rate of Dorpac's share price? (Select the best choice below.)
- The cost of equity using the discounted cash flow (or dividend growth) approach Grant Enterprises's stock is currently selling for $32.45 per share, and the firm expects its per-share dividend to be $1.38 in one year. Analysts project the firm's growth rate to be constant at 7.27%. Estimating the cost of equity using the discounted cash flow (or dividend growth) approach, what is Grant's cost of internal equity? O 15.55% . 11.52% O 12.10% O 10.94% Estimating growth rates It is often difficult to estimate the expected future dividend growth rate for use in estimating the cost of existing equity using the DCF or DG approach. In general, there are three available methods to generate such an estimate: • Carry forward a historical realized growth rate, and apply it to the future. • Locate and apply an expected future growth rate prepared and published by security analysts. • Use the retention growth model. Suppose Grant is currently distributing 50% of its earnings in the form of cash…National Co. has established a target capital structure of 30% debt and 70% common equity. The current market price of the firm’s stock is P25. It’s last dividend was P2 and its expected dividend growth rate is 2%. What will be the marginal cost of retained earnings be? 10.16% 14.8% 8.90% 11.9%Dorpac Corporation has a dividend yield of 1.7%. Its equity cost of capital is 7.7%, and its dividends are expected to grow at a constant rate. a. What is the expected growth rate of Dorpac's dividends? b. What is the expected growth rate of Dorpac's share price?
- Next year’s expected firm earnings are $4,000, shares outstanding 1000, ROE=14%capitalization rate 10%, b(plowback ratio)=10% and assuming constant growth dividends. Calculate Po and Po in a no-growth case (b=0)Dorpac Corporation has a dividend yield of 1.4%. Its equity cost of capital is 7.8%, and its dividends are expected to grow at a constant rate. a. What is the expected growth rate of Dorpac's dividends? b. What is the expected growth rate of Dorpac's share price? a. What is the expected growth rate of Dorpac's dividends? The growth rate will be %. (Round to one decimal place.)Given the following information, calculate the WACC. Capital Structure: Debt = 40% Pref Stock = 20% Common St = 40% Additional Information: Corporate Tax rate Preferred Dividend 25% $8.50 %3D Expected Common Dividend = $2.50 $105.00 Preferred Price= Growth Rate = 7% 9.5% Bond Yield = Preferred Floatation Cost = $3.60 $75.00 Common Stock Price=
- Kirby Enterprises’s stock is currently selling for $32.45 per share, and the firm expects its per-share dividend to be $2.35 in one year. Analysts project the firm’s growth rate to be constant at 7.27%. Estimating the cost of equity using the discounted cash flow (or dividend growth) approach, what is Kirby’s cost of internal equity? 14.51% 13.78% 18.14% 19.59% Estimating growth rates It is often difficult to estimate the expected future dividend growth rate for use in estimating the cost of existing equity using the DCF or DG approach. In general, there are three available methods to generate such an estimate: • Carry forward a historical realized growth rate, and apply it to the future. • Locate and apply an expected future growth rate prepared and published by security analysts. • Use the retention growth model. Suppose Kirby is currently distributing 75% of its earnings in the form of cash dividends. It has also historically…Estimating Components of both WACC and DDMAn analyst estimates the cost of debt capital for Abbott Laboratories is 3.0% and that its cost of equity capital is 5.0%. Assume that ABT’s statutory tax rate is 21%, the risk-free rate is 2.1%, the market risk premium is 5%, the ABT market price is $84.10 per common share, and its dividends are $1.28 per common share.(a) Compute ABT’s average pretax borrowing rate and its market beta. (Round your answers to one decimal place.) Average borrowing rate = Market beta = (b) Assume that its dividends continue at the current level in perpetuity. Use the constant perpetuity dividend discount model to infer the market's expected cost of equity capital. (Hint: Use Price per share = Dividends per share/Cost of equity capital.) (Round your answer to one decimal place.)The calculation of WACC involves calculating the weighted average of the required rates of return on debt, preferred stock, and common equity, where the weights equal the percentage of each type of financing in the firm’s overall capital structure. Q1. ________is the symbol that represents the cost of preferred stock in the weighted average cost of capital (WACC) equation. Q2. Avery Co. has $3.9 million of debt, $2 million of preferred stock, and $2.2 million of common equity. What would be its weight on debt? a. 0.27 b. 0.25 c. 0.48 d. 0.20 Q1. Option 1 rS or Option 2 rD or Option 3 rP or Option 4 rE Please provide the correct answers. Thank you!
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