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Unformatted text preview: 0 1.40 19.0 540 PART 4 Long-Term Financial Decisions required return of owners, ks, increases with increasing risk, as measured by the
coefficient of variation of EPS. Estimating Value
The value of the firm associated with alternative capital structures can be estimated by using one of the standard valuation models. If, for simplicity, we
assume that all earnings are paid out as dividends, we can use a zero-growth valuation model such as that developed in Chapter 7. The model, originally stated in
Equation 7.3, is restated here with EPS substituted for dividends (because in each
year the dividends would equal EPS):
ks (12.12) By substituting the expected level of EPS and the associated required return, ks,
into Equation 12.12, we can estimate the per-share value of the firm, P0.
EXAMPLE We can now estimate the value of Cooke Company’s stock under each of the
alternative capital structures. Substituting the expected EPS (column 1 of Table
12.13) and the required returns, ks (column 2 of Table 12.14), into Equation
12.12 for each of t...
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