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Unformatted text preview: Problems Problem 13-7 Problem 13-11 Problem 13-12 Problem 13-13 Table 13-1 Table 13-4 Problem 13-7 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