Complete the following graded homework assignment in a Word document named FIN515_Homework4_yourname.
Show the details of your calculation and work in your answer to the problems.
Problems (pp. 303-305)
9-4 Dividend Yield and Cost of Equity Capital
9-5 No Growth Company
9-6 Value of Operations of Constant Growth
9-7 Expected Growth Rate of Constant Growth Company
9-12 Non Constant Dividend
9-1 Future Value of a Company
9-19 Enterprise Value
Problems (pp. 427–429)
12-1 Equity Cost of Capital
12-3 Higher Equity Cost of Capital
12-26 Equity Cost of Capital, Debt Cost of Capital and WACC
by Jonathan Berk & Peter DeMarzo
© 2014 Pearson Education
Problems pp. 303 – 305
Question 1. Assume Evco, Inc., has a current price of $50 and will pay a $2 dividend in one
year, and its equity cost of capital is 15%. What price must you expect it to sell for right after
paying the dividend in one year in order to justify its current price?
Question 4. Krell Industries has a share price of $22 today. If Krell is expected to pay a dividend
of $0.88 this year, and its stock price is expected to grow to $23.54 at the end of the year, what is
Krell’s dividend yield and equity cost of capital?
Question 5. NoGrowth Corporation currently pays a dividend of $2 per year, and it will
continue to pay this dividend forever. What is the price per share if its equity cost of capital is
15% per year?
Question 6. Summit Systems will pay a dividend of $1.50 this year. If you expect Summit’s
dividend to grow by 6% per year, what is its price per share if its equity cost of capital is 11%?
Question 7. Dorpac Corporation has a dividend yield of 1.5%. Dorpac’s equity cost of capital is
8%, and its dividends are expected to grow at a constant rate.
a. What is the expected growth rate of Dorpac’s dividends?
b. What is the expected growth rate of Dorpac’s share price?
Question 12. Procter & Gamble will pay an annual dividend of $0.65 one year from now.
Analysts expect this dividend to grow at 12% per year thereafter until the fifth year. After then,
growth will level off at 2% per year. According to the dividend-discount model, what is the value
of a share of Procter & Gamble stock if the firm’s equity cost of capital is 8%?
Question 19. Heavy Metal Corporation is expected to generate the following free cash flows
over the next five years:
FCF ($ millions) 53 68 78 75 82
After then, the free cash flows are expected to grow at the industry average of 4% per year.
Using the discounted free cash flow model and a weighted average cost of capital of 14%:
• a. Estimate the enterprise value of Heavy Metal.
• b. If Heavy Metal has no excess cash, debt of $300 million, and 40 million shares
outstanding, estimate its share price.
Problems pp. 427 – 429
Question 1. Suppose Pepsico’s stock has a beta of 0.57. If the risk-free rate is 3% and the
expected return of the market portfolio is 8%, what is Pepsico’s equity cost of capital?
Question 3. Aluminum maker Alcoa has a beta of about 2.0, whereas Hormel Foods has a beta of
0.45. If the expected excess return of the marker portfolio is 5%, which of these firms has a
higher equity cost of capital, and how much higher is it?
Question 26. Unida Systems has 40 million shares outstanding trading for $10 per share. In
addition, Unida has $100 million in outstanding debt. Suppose Unida’s equity cost of capital is
15%, its debt cost of capital is 8%, and the corporate tax rate is 40%.
a. What is Unida’s unlevered cost of capital?
b. What is Unida’s after-tax debt cost of capital?
c. What is Unida’s weighted average cost of capital?