Fundamentals of Corporate Finance (3rd Edition) (Pearson Series in Finance)
Fundamentals of Corporate Finance (3rd Edition) (Pearson Series in Finance)
3rd Edition
ISBN: 9780133507676
Author: Jonathan Berk, Peter DeMarzo, Jarrad Harford
Publisher: PEARSON
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Chapter 10, Problem 1DC

DATA CASE As a new junior analyst for a large brokerage firm, you are excited to demonstrate the skills you learned in college and prove that you are worth your attractive salary. Your first assignment is to analyze Johnson & Johnson stock. Your boss recommends determining prices based on both the discounted free cash flow valuation method and the comparable ratio method. You are a little concerned about your boss's recommendation because your finance professor explained that these two valuation methods can result in widely differing estimates when applied to real data. You are really hoping the two methods will reach similar prices. Good luck with that!

l. GO to Reuters (http://www.reuters.com) and enter the for Johnson & Johnson (JNJ) in the "Search" box, then select Johnson and Johnson. From the main page for JNJ, gather the following information, and enter it into a spreadsheet:

a. The current stock price (on the left side of the page)
b. The EPS (TTM)
c. The number of shares of stock outstanding
d. The industry P/E (TTM) ratio

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Scenario one: Under what circumstances would it be appropriate for a firm to use different cost of capital for its different operating divisions? If the overall firm WACC was used as the hurdle rate for all divisions, would the riskier division or the more conservative divisions tend to get most of the investment projects? Why? If you were to try to estimate the appropriate cost of capital for different divisions, what problems might you encounter? What are two techniques you could use to develop a rough estimate for each division’s cost of capital?
Scenario three: If a portfolio has a positive investment in every asset, can the expected return on a portfolio be greater than that of every asset in the portfolio? Can it be less than that of every asset in the portfolio? If you answer yes to one of both of these questions, explain and give an example for your answer(s). Please Provide a Reference
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Fundamentals of Corporate Finance (3rd Edition) (Pearson Series in Finance)

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