Assignment Content

1. Complete Problems and Cases 11.10 (Page 899 of the Financial Reporting Text) Calculating Required Rates of Return on Equity Capital Across Different Industries.

   Please submit your homework as a Word Document. Do not exceed 100 words per answer for each of the three comparisons in part "a." Create tables to show your work in parts b and c; these should created in Excel and then pasted into Word as a "Microsoft Excel Worksheet Object."

   For the text answer to the last part of "c" limit your answer to one or two sentences and 150 words (maximum). In fact a well developed single sentence is preferable.

Problems and Cases LO 11-3 11.10 Calculating Required Rates of Return on Equity Capital across Different Industries. The data in Exhibit 11.3 on industry median betas suggest that firms in the following three sets of related industries have different degrees of systematic risk. Median Beta during 2003-2012 0.77 versus 1.31 0.68 versus 1.09 Utilities versus Petroleum and Natural Gas Food Products (Grocery Stores) versus Apparel (Retailers) Banking (Depository Institutions) versus Financial Trading (Security and Commodity Brokers) 0.76 versus 1.09 REQUIRED a. For each matched pair of industries, describe factors that characterize a typical firm's business model in each industry. Describe how such factors would contribute to differen- ces in systematic risk. b. For each matched pair of industries, use the CAPM to compute the required rate of return on equity capital for the median firm in each industry. Assume that the risk-free rate of return is 4.0% and the market risk premium is 5.0%. C. For each matched pair of industries, compute the present value of a stream of $1 dividends for the median firm in each industry. Use the perpetuity-with-growth model and assume 3.0% long-run growth for each industry. What effect does the difference in systematic risk across industries have on the per-dollar dividend valuation of the median firm in each industry