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

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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?

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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?

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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) ___________________________________.

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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.

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