Each of the six firms in the table below is expected to pay the listed dividend payment every year in perpetuity.

Firm Dividend ($ million) Cost of Capital (%/Year)

S1 10.2 7.8 S2 10.2 11.1 S3 10.2 13.4 B1 102 7.8 B2 102 11.1 B3 102 13.4

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 value ranking?