Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Estimating WACC and Expected Growth in Dividends Model Assume FedEx Corporation (NYSE: FDX) was trading at $107.47 at May 31, 2011. Its dividend per share

Estimating WACC and Expected Growth in Dividends Model Assume FedEx Corporation (NYSE: FDX) was trading at $107.47 at May 31, 2011. Its dividend per share was $0.36, its market beta was estimated to be 0.7, its average borrowing rate is 9.7%, and its marginal tax rate is 36%. FedEx's market value of equity (market cap) is $32.95 billion and its total market value (enterprise value) is $34.31 billion. Assume a risk-free rate of 4.0% and a market risk premium of 4.4% to answer the following requirements. (a) Estimate FedEx's cost of debt capital, cost of equity capital, and weighted average cost of capital.(Round your answers to one decimal place.) Cost of debt capital =? Cost of equity capital =?

Calculate the weighted average cost of capital.(Use your rounded answers from above. Do not round until your final answer. Round to one decimal place.)

Weighted average cost of capital = ? (b) Using the dividend discount model, and assuming a constant perpetuity for dividends, estimate FedEx's intrinsic value per share.(Use the rounded cost of equity capital calculated in (a). Round your answer to two decimal places.) (c) Using the Gordon growth DDM and assuming next period's dividends equal $0.36 and grow at a constant rate for each period thereafter, infer the market's expected growth in dividends that are necessary for FedEx's intrinsic valueto equal $107.47 per common share. Assume that its cost of equity capital is 7.1%.(Do not round until your final answer. Round to one decimal place.) Discuss the reasonableness of this growth factor. (Choose One)

(a)The growth in dividend factor is close to what was expected due to the fact DDM places the correct amount of weight on the dividends beyond the forecast horizon.(b)The growth in dividend factor is lower than expected due to the fact DDM places a tiny amount of weight on the dividends beyond the forecast horizon.(c)The growth in dividend factor is higher than expected due to the fact DDM places a tremendous amount of weight on the dividends beyond the forecast horizon.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Introduction to Finance Markets, Investments and Financial Management

Authors: Ronald W. Melicher, Edgar A. Norton

16th edition

1119398282, 978-1-119-3211, 1119321115, 978-1119398288

More Books

Students also viewed these Finance questions

Question

Describe Humes general approach to the problem of causality.

Answered: 1 week ago

Question

What are positive and negative aspects of delegation? LO-3

Answered: 1 week ago