Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN: 9781285190907
Author: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher: Cengage Learning
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Chapter 11, Problem 10PC
The data in Exhibit 11.3 on industry median betas suggest that firms in the following three sets of related industries have different degrees of systematic risk.
REQUIRED
- a. For each matched pair of industries, describe factors that characterize a typical firm’s business model in each industry. Describe how such factors would contribute to differences in systematic risk.
- b. For each matched pair of industries, use the
CAPM to compute the required rate ofreturn on equity capital for the median firm in each industry. Assume that the risk-free rate of return is 4.0% and the market risk premium is 5.0%. - c. For each matched pair of industries, compute the
present value of a stream of $1 dividends for the median firm in each industry. Use the perpetuity-with-growth model and assume 3.0% long-run growth for each industry. What effect does the difference in systematic risk across industries have on the per-dollar dividend valuation of the median firm in each industry?
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Financial Reporting, Financial Statement Analysis and Valuation
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