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 9.5%, 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 5.4% and a market risk premium of 5.8% 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 = 6.1 Answer

% Cost of equity capital = 9.5 Answer

%

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

Weighted average cost of capital = Answer

% (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.) $Answer

(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 value from the model to equal $107.47 per common share. Assume that its cost of equity capital is 9.5%. (Do not round until your final answer. Round to one decimal place.) Answer

%

--

PLEASE SHOW WORK********

--