CAPM and Required Return: The company has a beta of 1.1, and the closest competitor has a beta of 0.30. The required return on an index fund that holds the entire stock market is 11%. The risk-free rate of interest is 4.5%. By how much does your company’s required return exceed your competitor’s required return?
Constant Growth Valuation: The company is expected to pay a $1.80 per share dividend at the end of the year (i.e., D1 = $1.80). The dividend is expected to grow at a constant rate of 4% a year. The required rate of return on the stock, rs, is 10%. What is the stock’s current value per share?
Nonconstant Growth Valuation: The company recently paid a dividend, D0, of $2.75. It expects to have nonconstant growth of 18% for 2 years followed by a constant rate of 6% thereafter. The firm’s required return is 12%.
How far away is the horizon date?
What is the firm’s horizon, or continuing, value?
What is the firm’s intrinsic value today, P0?
Weighted Average Cost of Capital: The company has a target capital structure of 35% debt and 65% common equity, with no preferred stock. Its before-tax cost of debt is 8%, and its marginal tax rate is 40%. The current stock price is P0 = $22.00. The last dividend was D0 = $2.25, and it is expected to grow at a 5% constant rate. What is its cost of common equity and its WACC?
Capital Budgeting Criteria: The company has an 11% WACC and is considering two mutually exclusive investments (that cannot be repeated) with the following cash flows:
What is each project’s NPV?
What is each project’s IRR?
What is each project’s MIRR?
From your answers to parts a, b, and c, which project would be selected? If the WACC was 18%, which project would be selected?
Construct NPV profiles for Projects A and B.
Calculate the crossover rate where the two projects’ NPVs are equal.
What is each project’s MIRR at a WACC of 18%?
