Estimating WACC and Expected Growth in Dividend Discount Model United Parcel Service, Inc. was trading at $96.23 at December 31, 2015. Its dividend per share was

$3.12, its market beta was estimated to be 0.99, its average pretax borrowing rate was 2.4%, and its assumed statutory tax rate was 37%, consisting of the 35% federal rate plus the 2% state and international rate, net of any federal benefits. UPS’s market value of equity (market capitalization) was $85.26 billion, computed as 886 million shares times its $96.23 price, and its total market value (enterprise value) was $100.78 billion, computed as $85.26 billion in equity plus the fair value of long-term debt of $15.52 billion (disclosed in note 8 of the financial statements). Assume a risk-free rate of 2.5% and a market risk premium of 5% to answer the following requirements.

Required

????????????Estimate UPS’s cost of debt capital, cost of equity capital, and weighted average cost of capital.

????????????Using the dividend discount model, and assuming a constant perpetuity at its current dividend level, estimate UPS’s intrinsic value per share.

c????????Using the Gordon growth DDM, and assuming next period’s dividends equal $3.12 and grow at a constant rate for each period thereafter, infer the market’s expected growth in dividends that are necessary for UPS’s intrinsic value to equal $96.23 per common share. Discuss the reasonableness of this growth factor. (Assume that its cost of equity capital is 7.45%.)