Each of the six firms in the table below is expected to pay the listed dividend payment
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a. Using the cost of capital in the table, calculate the market value of each firm.
b. 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 constituent securities.) Repeat using the B firms.
c. 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 lowest market value?
d. Repeat part c but rank the firms by the dividend yield instead of the market value. What can you conclude about the dividend yield ranking compared to the market valueranking?
Dividend yield refers to a stock's annual dividend payments to shareholders, expressed as a percentage of the stock's current price. The dividend per share that a company pays divided by the share price. This is reported on the financial statements... Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...
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a Firm Dividend Cost of Capital Market value S1 10 8 12500 S2 10 12 8333 S3 10 14 7143 B1 100 ...View the full answer
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