A
To calculate: The required
Introduction: The required rate of return can be defined as the amount which is expected by the investor out of the investment.
The intrinsic value of the company can be called as the actual worth of the company which includes tangible and intangible factors.
B
To calculate: The intrinsic value by using the table and the two-stage
o be.
Introduction: The required rate of return can be defined as the amount which is expected by the investor out of the investment.
The intrinsic value of the company can be called as the actual worth of the company which includes tangible and intangible factors.
C
To calculate: It is to be determined based on the comparison of the company’s intrinsic value with the current market price which the company will be recommended.
Introduction:
The required rate of return can be defined as the amount which is expected by the investor out of the investment.
The intrinsic value of the company can be called the actual worth of the company which includes tangible and intangible factors.
D
To calculate: The one strength of the two stages DDM is to be described.
Introduction:
The required rate of return can be defined as the amount which is expected by the investor out of the investment.
The intrinsic value of the company can be called the actual worth of the company which includes tangible and intangible factors.
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Chapter 18 Solutions
GEN COMBO LOOSELEAF INVESTMENTS; CONNECT ACCESS CARD
- The file Fortune500 contains data for profits and market capitalizations from a recent sample of firms in the Fortune 500 a. Prepare a scatter diagram to show the relationship between the variables Market Capitalization and Profit in which Market Capitalization is on the vertical axis and Profit is on the horizontal axis. Comment on any relationship between the variables. b. Create a trendline for the relationship between Market Capitalization and Profit. What does the trendline indicate about this relationship?arrow_forwardYou have assigned the following values to these three firms: Upcoming Dividend $0.50 Estee Lauder Kimco Realty Nordstrom Price $36.00 75.00 11.00 1.58 2.00 Estee Lauder required return Kimco Realty required return Nordstrom required return Assume that the market portfolio will earn 17.20 percent and the risk-free rate is 8.20 percent. Compute the required return for each company using both CAPM and the constant-growth model. (Do not round intermediate calculations and round your final answers to 2 decimal places.) CAPM Growth 11.40% 17.00 8.80 % % % Beta 0.92 1.28 1.24 Constant-Growth Model % % %arrow_forwardYou have the following information about Burgundy Basins, a sink manufacturer. Equity shares outstanding Stock price per share Yield to maturity on debt Book value of interest-bearing debt Coupon interest rate on debt Market value of debt Book value of equity Cost of equity capital Tax rate a. What is the internal rate of return on the investment? Note: Round your answer to 2 decimal places. Internal rate of return I Weighted-average cost Burgundy is contemplating what for the company is an average-risk investment costing $38 million and promising an annual ATCF of $4.9 million in perpetuity. % b. What is Burgundy's weighted-average cost of capital? Note: Round your answer to 2 decimal places. 20 million % $39 7.5% $350 million 4.4% $ 245 million $ 410 million 11.8% 35%arrow_forward
- Steeler Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: risk-free rate (rRF) = 4.15%; market risk premium = 5.00%; and beta = 1.14. Based on the CAPM approach, what is the cost of equity from retained earnings? 9.85% 9.67% 10.60% 10.28% 10.93%arrow_forwardEstimate the weighted-average cost of capital for Home Depot (HD), Altria (MO), Caterpillar (CAT), and Intel (INTC). You can estimate the expected stock returns for these companies by using the betas shown on finance.yahoo.com. You can also use Yahoo! Finance to find the relative proportions of equity and debt for each company. Remember, though, to use the mar- ket value of the equity, not its book value. Finding the yield on the debt is a little trickier. One possibility it to log on to the Federal Reserve Bank of St. Louis site at https://fred.stlouisfed .org/ to find the current level of Treasury yields and the yield spreads (i.e., the extra yield for bonds with different ratings). An alternative is to view recent transactions at www.finra.org /industry/trace/corporate-bond-data. Note: As we write this, Moody's provides an A rating for all four companies.arrow_forwardYou are now an equity analyst. We now find that the actual valuation of Company X is 130. Your manager suggests basing the price on a discounted dividend model and a discounted free cash flow valuation method. However, these two methods may produce very different estimates when applied to actual data. The discounted dividend model works out to a price of 60, while the discounted free cash flow valuation method works out to a price of 10. Question: Explain to your management why the two valuation methodologies provide different estimations. Specifically, discuss the assumptions implicit in the two methodologies, as well as the assumptions you made when doing your analysis. Why do these projections differ from Company X's current stock price?arrow_forward
- Consider the following security: Brous Metalworks Earnings Per Share, Time = 0 $2.00 Dividend Payout Rate 0.250 Return on Equity 0.150 Market Capitalization Rate 0.125 Required: Using the information in the tables above, please calculate the sustainable growth rate, dividends per share, and intrinsic value per share. Then solve for the present value of growth opportunities. (Use cells A5 to B8 from the given information to complete this question.) Brous Metalworks Sustainable Growth Rate Dividends per share (Next Year) Intrinsic Value No-Growth Value Per Share Present Value of Growth Opportunities (PVGO)arrow_forwardExpress Steel Corporation wishes to calculate its cost of common stock equity, by using the capital asset pricing model (CAPM). The firm’s investment advisors and its own analysts indicate that the risk-free rate equals 9,1%; the firm’s beta equals 0,75; and the market return equals 16%. Please estimate the cost of common stock equity by using CAPM.arrow_forwardhelp pleasearrow_forward
- Assume that West Corp shares returns required in the market by investors are a function of two economic factors: S1 is 0.04 and S2 is 0.01, where risk-free rate is 7%. West shares have reaction coefficient to the factors, such that S1 = 1.3 and S2 = 0.90. Compute the expected rate of return using the arbitrage pricing model.arrow_forwardAssume that you are a consultant to Thornton Inc., and you have been provided with the following data: risk 1.8. What is the cost of equity from free rate rRF = 5.5%; market risk premium RPM retained earnings based on the CAPM approach? = 6.0%; and b =arrow_forwardUsing the equity asset valuation model (CAPM) equation, determine the required return for the shares of the following companies, if the market return is 7.50% (Rm = 7.50%) and the risk-free asset return is 1.25% (RF = 1.25%). You must show all counts. Stock Beta SKT 0.65 COST 0.90 SU 1.42 AMZN 1.57 V 0.94arrow_forward
- Essentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage Learning