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

Suppose a firm has a market beta of 1.34 and the risk free interest rate is 5.3%.In addition,the excess return over the risk-free rate is 5.9%.Calculate the firm's cost of equity capital using the CAPM model.

Zonk Corp. The following data pertains to Zonk Corp.,a manufacturer of ball bearings (dollar amounts in millions): Determine the weight on equity capital that should be used to calculate Zonk's weighted-average cost of capital:

For each of the following companies,determine the total dividends paid to common equity holders in order to value the firm:

Under the assumption of clean surplus accounting,how would you compute total dividends paid to common equityholders in order to value the firm?

Why do investors typically accept a lower risk-adjusted rate of return on debt capital than equity capital? Suppose a stable,financially healthy,profitable,tax-paying firm that has been financed with all equity and no debt decides to add a reasonable amount of debt to its capital structure.What effect will that change in capital structure likely have on the firm's weighted average cost of capital?

For each of the following scenarios determine the value as of the beginning of 2012 of the continuing dividend:

Zonk Corp. The following data pertains to Zonk Corp.,a manufacturer of ball bearings (dollar amounts in millions): Assume that Zonk is a potential leveraged buyout candidate.Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pre tax borrowing cost of 14 percent and 30 percent common equity.Compute the weighted average cost of capital for Zonk based on the new capital structure.

Zonk Corp. The following data pertains to Zonk Corp.,a manufacturer of ball bearings (dollar amounts in millions): Assume that Zonk is a potential leveraged buyout candidate.Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pretax borrowing cost of 14 percent and 30 percent common equity.Compute the revised equity beta for Zonk based on the new capital structure.

Why is the dividends valuation approach applicable to firms that do not pay periodic (quarterly or annual)dividends?

Under the cash-flow-based valuation approach,free cash flows can be used instead of dividends as the expected future payoffs to the investor in the numerator of the general valuation model because:

The following financial statement data pertains to Outside,Inc.,a manufacturer of men's outerware (dollar amounts in millions): Required: a.Calculate the company's cost of equity capital. b.Calculate the weight on debt capital that should be used to determine Outside's weighted-average cost of capital. c.Calculate the weight on equity capital that should be used to determine Outside's weighted-average cost of capital. d.Calculate Outside's weighted-average cost of capital.

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?

In theory,the value of a share of common equity is the present value of ____________________________________________________________. the expected future dividends

Equity-based valuation models are based on all metrics except

Which of the following is not a problem with using a dividend-based valuation formula

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 ___________________________________.

Zonk Corp. The following data pertains to Zonk Corp.,a manufacturer of ball bearings (dollar amounts in millions): Determine the weight on debt capital that should be used to calculate Zonk's weighted-average cost of capital:

The following financial statement data pertains to Northridge,Inc.,a manufacturer of women's outerware (dollar amounts in millions): Required: a.Calculate the company's cost of equity capital. b.Calculate the weight on debt capital that should be used to determine Northridge's weighted-average cost of capital. c.Calculate the weight on equity capital that should be used to determine Northridge's weighted-average cost of capital. d.Calculate Northridge's weighted-average cost of capital.

A company with a market beta of 1 has systemic risk ____________________ to the average amount of systemic risk of all equity securities in the market.

According to the text,dividends are value-relevant even though the firm's dividend policy is irrelevant.How can that be true? What is the key assumption in the theory of dividend policy irrelevance?