Fantastic Furniture is experiencing growth over the last few years. Fantastic Furniture's dividends over last few years are:

Year    Dividend (in $)

2016   2.7000

2017   2.9160

2018   3.1492

2019   3.4012

2020 _{(current year)} 3.6733

In line with it's growth, Fantastic Furniture is considering undertaking an additional investment for expanding their current business operation. It is considering either to have "Computer Division" or "Home Appliance Division". The new projects' cash flows are as follows:

    Computer Division                Home Appliance Division

Year: 0        -200,000                    Year: 0           - 150,000

          1        +100,000                            1          + 65,000

           2        + 80,000                            2           + 65,000

            3          + 90,000                         3            + 65,000

The current total market value of the company's shares is$10 million, ex div; and the company currently has 200,000 shares outstanding. The company has a beta of 1.077.

The Computer industry has a beta of 2.1 and the Home Appliance industry has a beta of 0.90. The annual return on three year government bonds is currently 3% and the expected return on the ASX stock market index is 15%. Ignore tax.

Find out the following: (Select the closest answer)

The cost of equity is which of the following 15.94% 16.37% 13.81% 28.21% 18.20% .

Using DVM, the average annual growth rate is which of the following 8.15% 7.85% 7.99% .

Using CAPM the original cost of capital for Home Appliance Division is which of the following 15.94% 16.37% 13.81% 28.21% 18.20% .

Using Cost of capital as the discount rate, we will accept which of the following Computer Division or Home Appliance Division .

Using individual company's CAPM as discount rate, we will accept which of the following Computer Division or Home Appliance Division .

Answer rating: 100% (QA)

Before answering these questions we need to define some concepts first 1 The cost of equity is estimated using the Capital Asset Pricing Model CAPM in ... View the full answer