Refer to the financial statement forecasts for Massachusetts Stove Company (MSC) prepared for Case 10.2. The management
Question:
MSC is not publicly traded and therefore does not have a market equity beta. Using the market equity beta of the one publicly traded woodstove and gas stove manufacturing firm and adjusting it for differences in the debt to equity ratio, income tax rate, and privately owned status of MSC yields a cost of equity capital for MSC of 13.55 percent.
Required
a. Use the clean surplus accounting approach to derive the projected total amount of dividends MSC pays common equity shareholders in Years 8 through 12.
b. Given That MSC Is a privately held company, assume that ending book value of common equity at the end of Year 12 is a reasonable estimate of the value at which the common shareholders' equity could be liquidated. Calculate the value of the equity of MSC as of the end of Year 7 under each of the three scenarios. Ignore the midyear discounting adjustment, c. How do these valuations affect your advice to the management of MSC regarding the addition of gas stoves to its woodstove line?
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...
Step by Step Answer:
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1337614689
9th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw