Question
Use Yahoo Finance as the information source for this exercise. 1. Estimate the cost of equity (Re) using the Dividend Growth Model (DGM) and the
Use Yahoo Finance as the information source for this exercise.
1. Estimate the cost of equity (Re) using the Dividend Growth Model (DGM) and the Capital Asset Pricing Model (CAPM), respectively. Use the average of the results of the two models as the cost of equity for XOM.
(a). Dividend Growth Model (DGM): XOM was one of the biggest payers in dividends. Using the dividend information provided in the Excel and the relevant information from Yahoo Finance, estimate cost of equity and complete the below table. Assuming the current share price is $103.66.
| Arithmetic average g: | % |
| Forward dividend per share: | $ |
| Re_DGM: | % |
(b). Capital Asset Pricing Model (CAPM): Look up the following information from Yahoo Finance. Estimate the cost of equity using CAPM and complete the below table. Assume the 10-year T-bond yield is 4% and the market risk premium is 5%.
| Beta: | x |
| Re_CAPM: | % |
(c) From this exercise, you would see that your estimation is only as good as your assumptions of each components that go into the calculation. It's not entirely science, and exercising judgment is where the skill and experience come to play! Assuming that you decide to use the average of the two as the final estimate for the cost of equity. Your final cost of equity for XOM is:
| Re: | % |
2. Estimate the cost of debt: Using the bond information provided in the Excel, estimate (i) the market value of outstanding amount for each bond, (ii) the YTM for each bond, and (iii) the cost of debt as the market value weighted average of YTM of all bonds.
| Rd: | % |
3. Capital structure: Given the share price of $103.66 and the number of shares outstanding is 4.01 billions, estimate the weights of debt and equity based on the market value, and complete the below table. Hint: you know the market value outstanding amount of each bond, by summing the amount along all bonds, it gives you the total market value of the debt.
| $ in billions | Weight (%) | |
| Debt, MV | $ b | % |
| Equity, MV | $ b | % |
4. Estimate WACC, assuming the tax rate is 33%.
| WACC: | % |
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Financial Management For Nurse Managers Merging The Heart With The Dollar
Authors: Janne Dunham-Taylor, Joseph Z. Pinczuk
1st Edition
1284031039, 9781284031034
