You have assigned the following values to these three firms: US Bancorp Praxair Eastman Kodak Price $34.55 Upcoming Dividend $ 2.35 1.36 2.00 US Bancorp required return Praxair required return Eastman Kodak required return CAPM 0.18 0.24 Growth 37.80 50.35 Assume that the market portfolio will earn 13.30 percent and the risk-free rate is 6.00 percent. Compute the required return for each company using both CAPM and the constant-growth model. Note: Do not round intermediate calculations and round your final answers to 2 decimal places. % % 6.20% Answer is complete but not entirely correct. 0.11% 13.50 13.80 Beta 1.67 2.49 0.64 Constant-Growth Model 0.16 X % 0.18% 0.17%

You have assigned the following values to these three firms: US Bancorp Praxair Eastman Kodak Price $34.55 Upcoming Dividend $ 2.35 1.36 2.00 US Bancorp required return Praxair required return Eastman Kodak required return CAPM 0.18 0.24 Growth 37.80 50.35 Assume that the market portfolio will earn 13.30 percent and the risk-free rate is 6.00 percent. Compute the required return for each company using both CAPM and the constant-growth model. Note: Do not round intermediate calculations and round your final answers to 2 decimal places. % % 6.20% Answer is complete but not entirely correct. 0.11% 13.50 13.80 Beta 1.67 2.49 0.64 Constant-Growth Model 0.16 X % 0.18% 0.17%

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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You are reviewing a five-year monthly return regression of returns for Jamesway Corp, a U.S.-based consumer product company, against the S&P 500. 0.8 ReturnJamesway = 0.25% + 0.80*ReturnS&P 500 (R2 = 25%). The U.S. treasury bond rate is currently 4.75%, the treasury bill rate today is 4.25% and the historical equity risk premium is 4.91%. b. Based upon this regression, estimate the long-term cost of equity in $ currency terms for this company. a. 9.66% b. 7.48% c. 8.68% d. 10.25%
You forecast the company A’s future earning is going to be $5.34 per share. The current market price is $55. What the market forward PE ratio? The estimated growth rate is 10%, what is the PEG ratio based on your estimate of growth rate? The industry average has a P/E ratio of 14 and growth rate of 12%, what does it mean for A’s stock price?
Jersey Jewel Mining has a beta coefficient of 1.5. Currently the risk-free rate is 4 percent and the anticipated return on the market is 6 percent. JJM pays a $5.00 dividend that is growing at 3 percent annually. Do not round intermediate calculations. What is the required return for JJM? Round your answer to two decimal places. % Given the required return, what is the value of the stock? Round your answer to the nearest cent. $ If the stock is selling for $159, what should you do? The stock overvalued and be purchased. If the beta coefficient declines to 1.2, what is the new value of the stock? Round your answer to the nearest cent. $ If the price remains $159, what course of action should you take given the valuation in d? The stock is and be purchased.
The cost of equity using the CAPM approach The current risk-free rate of return (rRF) is 3.86%, while the market risk premium is 6.63%. the Monroe Company has a beta of 0.92. Using the Capital Asset Pricing Model (CAPM) approach, Monroe's cost of equity is
You are going to value Lauryn's Doll Co. using the FCF model. After consulting various sources, you find that Lauryn's has a reported equity beta of 1.5, a debt-to-equity ratio of .4, and a tax rate of 21 percent. Assume a risk-free rate of 5 percent and a market risk premium of 7 percent. Lauryn's Doll Co. had EBIT last year of $46 million, which is net of a depreciation expense of $4.6 million. In addition, Lauryn's made $6.25 million in capital expenditures and increased net working capital by $3.6 million. Assume the FCF is expected to grow at a rate of 3 percent into perpetuity. What is the value of the firm? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) Firm value million
Bunkhouse Electronics is a recently incorporated firm that makes electronic entertainment systems. Its earnings and dividends have been growing at a rate of 36.5%, and the current dividend yield is 8.50%. Its beta is 1.33, the market risk premium is 14.50%, and the risk-free rate is 2.70%. a. Use the CAPM to estimate the firm's cost of equity. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. b. Now use the constant growth model to estimate the cost of equity. Note: Do not round intermediate calculations. Enter your answer as a whole percent. c. Which of the two estimates is more reasonable? a. Cost of equity % % c. Which of the two estimates is more reasonable? b. Cost of equity
You are going to value Lauryn’s Doll Co. using the FCF model. After consulting various sources, you find that Lauryn's has a reported equity beta of 1.4, a debt-to-equity ratio of .5, and a tax rate of 21 percent. Assume a risk-free rate of 4 percent and a market risk premium of 9 percent. Lauryn’s Doll Co. had EBIT last year of $42 million, which is net of a depreciation expense of $4.2 million. In addition, Lauryn's made $6 million in capital expenditures and increased net working capital by $1.0 million. Assume the FCF is expected to grow at a rate of 3 percent into perpetuity. What is the value of the firm? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)
Bunkhouse Electronics is a recently incorporated firm that makes electronic entertainment systems. Its earnings and dividends have been growing at a rate of 38.5%, and the current dividend yield is 10.50%. Its beta is 1.37, the market risk premium is 16.50%, and the risk-free rate is 2.30%. a. Use the CAPM to estimate the firm’s cost of equity. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) b. Now use the constant growth model to estimate the cost of equity. (Do not round intermediate calculations. Enter your answer as a whole percent.)
The Farmer Co. has a payout ratio of 65% and a return on equity (ROE) of 16% (assume that this is expected ROE for the upcoming year). What will be the appropriate price-to-book value (PBV) based on return differential if the expected growth rate in dividends is 5.6% and the required rate of return is 13% ?
You are going to value Lauryn's Doll Co. using the FCF model. After consulting various sources, you find that Lauryn's has a reported equity beta of 1.4, a debt-to-equity ratio of .4, and a tax rate of 21 percent. Assume a risk-free rate of 4 percent and a market risk premium of 8 percent. Lauryn's Doll Co. had EBIT last year of $41 million, which is net of a depreciation expense of $4.1 million. In addition, Lauryn's made $4 million in capital expenditures and increased net working capital by $2.0 million. Assume the FCF is expected to grow at a rate of 2 percent into perpetuity. What is the value of the firm? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) X Answer is complete but not entirely correct. Firm value $ 310.99 X million
Jersey Jewel Mining has a beta coefficient of 1.1. Currently the risk-free rate is 2 percent and the anticipated return on the market is 8 percent. JJM pays a $5.40 dividend that is growing at 4 percent annually. Do not round intermediate calculations. a. What is the required return for JJM? Round your answer to two decimal places. % b. Given the required return, what is the value of the stock? Round your answer to the nearest cent. $ c. If the stock is selling for $138, what should you do? The stock -Select- overvalued and -Select- ✓ be purchased. d. If the beta coefficient declines to 0.9, what is the new value of the stock? Round your answer to the nearest cent. $ e. If the price remains $138, what course of action should you take given the valuation in d? The stock is -Select- and -Select- ✓ be purchased.
Jersey Jewel Mining has a beta coefficient of 1.3. Currently the risk-free rate is 2 percent and the anticipated return on the market is 8 percent. JJM pays a $5.30 dividend that is growing at 6 percent annually. Do not round intermediate calculations. What is the required return for JJM? Round your answer to two decimal places. % Given the required return, what is the value of the stock? Round your answer to the nearest cent. $ If the stock is selling for $166, what should you do? The stock -Select-isis notItem 3 overvalued and -Select-shouldshould notItem 4 be purchased. If the beta coefficient declines to 1.2, what is the new value of the stock? Round your answer to the nearest cent. $ If the price remains $166, what course of action should you take given the valuation in d? The stock is -Select-overvaluedundervaluedItem 6 and -Select-shouldshould notItem 7 be purchased.

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