Exam 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach

In what case will using dividends expected to be paid to shareholders yield the same valuation for the firm as using free cash flows expected to be generated by the firm?

Implementing a dividend valuation model to determine the value of the common shareholders' equity requires an analyst to measure three elements. What are the three elements that the analyst needs to measure?

Because the market equity beta reflects the level of operating leverage, financial leverage, variability of sales, and other characteristics of a firm, there are situations where an analyst might have to adjust the beta because of changes in the capital structure. A situation that might require an analyst to estimate a new levered beta is a(n) ___________________________________.

Suppose a firm has a market beta of 1.24 and the risk-free interest rate is 6.25. In addition, the excess return over the risk-free rate is 6.3%. Calculate the firm's cost of equity capital using the CAPM model.