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?
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