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

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

WACC An analyst wants to value the sum of the debt and equity capital of the firm and is provided with the following information: An analyst wants to value the common shareholders' equity of Bridgetron, compute the relevant cost of capital that should be used.

When deriving the equity value of a firm an analyst forecasts the real dividends expected to be paid in the future. In this case which discount rate should be used?

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.

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

For each of the following scenarios determine the value as of the beginning of 2007 of the continuing dividend:

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

Zolar Corp. The following data pertains to Zolar Corp., a manufacturer of ball bearings (dollar amounts in millions): Assuming that riskless rate is 4.2% and the market premium is 6.2% calculate Zolar's cost of equity capital:

Provide the rationale for using expected dividends in a valuation model.

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