Each of the six firms in the table,

, is expected to pay the listed dividend payment every year in perpetuity.

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? 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?

Questions to be answered:

a. Using the cost of capital in the table, calculate the market value of each firm.

Using the cost of capital in the table, the market value of Company S1 is $_______ million. (Round to two decimal places.) Using the cost of capital in the table, the market value of Company S2 is $_______ million. (Round to two decimal places.) Using the cost of capital in the table, the market value of Company S3 is $_______million. (Round to two decimal places.) Using the cost of capital in the table, the market value of Company B1 is $_______ million. (Round to two decimal places.) Using the cost of capital in the table, the market value of Company B2 is $_______million.(Round to two decimal places.) Using the cost of capital in the table, the market value of Company B3 is $_______ million. (Round to two decimal places.)

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? Repeat using the B firms.

The expected return of a self-financing portfolio is as follows:

S firms expected return is ______%. (Round to two decimal places.) B firms expected return is ______%. (Round to two decimal places.)

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?

Ranking all six firms by their market values, the expected return of a self-financing portfolio is ________%. (Round to two decimal places.)

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?

Ranking the firms by dividend yield instead of market value, the expected return of a self-financing portfolio is ______%. (Round to two decimal places.)

Data Table (Click on the icon located on the top-right comer of the data table below in order to copy its contents into a spreadsheet Firm S2 S3 B1 B2 B3 Dividend (S million) 10.1 10.1 10.1 101.0 101.0 101.0 Cost of Capital (%/year) 7.6 12.3 13.1 7.6 12.3 13.1 PrintDone