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Unformatted text preview: Problems Problem 137 Problem 1311 Problem 1312 Problem 1313 Table 131 Table 134 Problem 137 Each of the six firms in the table below is expected to pay the listed dividend payment every year in perpetuity. Dividend Cost of Capital Firm ($ million) (%/Year) S1 10 8 S2 10 12 S3 10 14 B1 100 8 B2 100 12 B3 100 14 Using the cost of capital in the table, calculate the market value of each firm. a. b. c. d. Rank the three S firms by their market values and look at how their cost of capital is ordered. What would be the expected return for a self financing portfolio that went long on the firm with the largest market value and shorted the firm with the lowest market value? (The expected return of a self financing portfolio is the weighted average return of the consituent securities.) Repeat using the B firms. Rank all six firms by their market values. How does this ranking order the cost of capital? What would be the expected return for a self financing portfolio that went long on the firm with the largest market value and shorted the firm with the...
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This note was uploaded on 12/28/2009 for the course FEWEB CORPFIN taught by Professor Dorsman during the Spring '09 term at Vrije Universiteit Amsterdam.
 Spring '09
 dorsman

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