EBK CORPORATE FINANCE
EBK CORPORATE FINANCE
4th Edition
ISBN: 9780134202785
Author: DeMarzo
Publisher: VST
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Chapter 9, Problem 4P
Summary Introduction

To determine: The expected dividend yield and equity cost of capital.

Introduction:

Dividend discounted model

It is a method of calculating company stock value; the expected value is the sum of future dividend payments, which are discounted back to their present value. In other words, stock value is based on the sum of the present value of the future dividend.

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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?

Chapter 9 Solutions

EBK CORPORATE FINANCE

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