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10 Nov 2018

M12-22. Estimating Weighted Average Cost of Capital. Assume that a company has $1 billion in preferred stock and $3 billion in common stock. Also, it pays 6% dividends on preferred stock and its cost of equity capital is 7%. The company has no debt. Compute the company’s WACC.

M12-23. Estimating Company Value Using DDM with Constant Perpetuity. Assume that a company’s dividends per share are projected to remain at $1.20 each year, and that its cost of equity capital is 5%. Estimate the company’s per share stock price.

M12-25. Estimating Company Value Using DDM with Increasing Perpetuity. Assume that a company’s dividends per share are projected to grow at 2% each year, its next year’s dividends per share is $1.20, and its cost of equity capital is 5%. Estimate the company’s per share stock price.

M12-26. Estimating Company Value Using DDM with Increasing Perpetuity. Assume that a company paid $1.20 dividend per common share, its dividend per share is expected to grow at a constant rate of 2%, and its cost of equity capital is 5%. Estimate the company’s per share stock price.

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Casey Durgan
Casey DurganLv2
10 Nov 2018

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Related questions

Estimating Components of both WACC and DDM

Analysts estimate the cost of debt capital for Abbott Laboratories (NYSE: ABT) is 2.13% and that its cost of equity capital is 4.1%. Assume that ABT's marginal tax rate is 36%, the risk-free rate is 5.3%, the market risk premium is 5.7%, the ABT market price is $47.73 per common share, and its dividends are $1.26 per common share.

(a) Compute ABT's average borrowing rate and its market beta. (Round your answers to one decimal place.)
Average borrowing rate = Answer%
Market beta = Answer

(b) Assume that its dividends continue at the current level in perpetuity. Use the constant perpetuity dividend discount model to infer the market's expected cost of equity capital. (Hint: Use Price per share = Dividends per share/Cost of equity capital.) (Round your answer to one decimal place.)
Answer%

(c) Compare the inferred cost of equity capital from part (b) to the 4.1% estimated cost of equity capital from analysts.

The inferred cost of equity capital seems high compared to 4.1%, which suggests that the investment has a negative beta.

The inferred cost of equity capital seems low compared to 4.1%, which suggests that the investment has a negative beta.

The inferred cost of equity capital seems high compared to 4.1%, which suggests that the investment has a positive beta.

The inferred cost of equity capital seems low compared to 4.1%, which suggests that the investment has a positive beta.

S14-04 Estimating the DCF Growth Rate [LO1]

Suppose In a Found Ltd. just issued a dividend of $1.69 per share on its common stock. The company paid dividends of $1.35, $1.43, $1.50, and $1.61 per share in the last four years.

If the stock currently sells for $50, what is your best estimate of the company’s cost of equity capital using the arithmetic average growth rate in dividends? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

Cost of equity %


What if you use the geometric average growth rate? (Do not round intermediate calculation and round your answer to 2 decimal places. (e.g., 32.16))

Cost of equity

Suppose Stark Ltd. just issued a dividend of $2.57 per share on its common stock. The company paid dividends of $2.20, $2.31, $2.38, and $2.49 per share in the last four years.

1) If the stock currently sells for $65, what is your best estimate of the company’s cost of equity capital using the arithmetic average growth rate in dividends?

2) What if you use the geometric average growth rate?

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