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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Labrador technologies Inc. plans to become public soon. The board of directors
would like to know the value of common equity and have asked for your opinion.
The firm has $1,249,917 in preferred equity and the market value of its
outstanding debt equals $2,049,396. The WACC for this firm is estimated to be
8.92%. For this example assume the current assets are zero. Use the DCF valuation
model with the expected FCFs shown below; year 1 represents one year from today and
so on. The company expects to grow at a 3.0% rate after Year 5. Rounding to the
nearest penny, what is the value of common equity?
Free Cash
Period
Flow
Year 1 $1,370,274
Year 2 $1,761,479
Year 3 $1,909,652
Year 4 $2,361,090
Year 5 $2,744,645
see attached
Westfield Capital Management Co.’s equity investment strategy is to invest in companies with low price-to-book ratios, while considering differences in solvency and asset utilization. Westfield is considering investing in the shares of either Jerry’s Departmental Stores ( JDS) or Miller Stores (MLS). Selected financial data for both companies follow:
Required:
ComputeeachofthefollowingratiosforbothJDSandMLS: (1) Price-to-bookratio(2) Total-debt-to-equityratio(3) Fixed-asset-utilization(turnover)
Select the company that better meets Westfield’s criteria.
Eaton Electronic Company's treasurer uses both the capital asset pricing model and the dividend valuation model to compute
the cost of common equity (also referred to as the required rate of return for common equity).
Assume:
Rf
Km = 8%
= 6%
=
В
D₁ = $0.60
Po = $20
8 = 5%
= 1.8
a. Compute
K; (required rate of return on common equity based on the capital asset pricing model).
Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.
Ki
0.10%
b. Compute
Ke (required rate of return on common equity based on the dividend valuation model).
Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.
Ke
%
Chapter 11 Solutions
Financial Reporting, Financial Statement Analysis and Valuation
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