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Pasco Corporation has a beta of 0 . 9 . The market risk premium is 1 0 percent, and T - bills are currently yielding
Pasco Corporation has a beta of The market risk premium is percent, and Tbills
are currently yielding percent. The company's last dividend was $ and its current
stock price is $ Assume Greene's dividends were expected to grow at a percent
annual rate indefinitely.
Pasco has million shares of common stock outstanding, and bonds outstanding,
percent coupon, years to maturity, selling for $ for each bond with $ par
value. Bonds make annual payments. Assume the company's tax rate is percent.
a Calculate the cost of equity using the Constant Dividend Growth Model CDGM
and SML method CAPM respectively.
marks
b Why do you think two estimates in a using different methods are different?
marks
c Using the average value of cost of equity estimated using two methods in a to
calculate Pasco,s WACC.
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d Explain the 'separation theorem'.
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