Question 5 6 points Chapter 8 CLO 5

• The Vista Company is an established European multinational automaker that has its main headquarters in Milan, Italy.
• It was founded by Alex Frino and incorporated on April 10, 1980 and had ever since been selling automobiles and commercial vehicles under the Vista brand to the world.
• You work as a financial analyst and have recently been placed onto an assignment with the Vista Company.
• As per the firms financial information, the Vista Co. currently has 25,000 preferred shares and 15,000 common shares outstanding.
• The companys PREFERRED shares sell for $14.80 per share and currently pay a DPS of $2.10.
• The firms COMMON stocks trade for $27.40 per share and have paid a DPS of $3.80 this year, which is expected to grow at a constant rate of 3% in the future.
• The applicable risk-free rate reported by the Central Bank is 2%, the companys beta is 1.1, and the market risk premium is 4%.

1. Apply the Dividend Discount Model to calculate the rate of return on the firms COMMON equity. (1 point)

2. Use the Capital Asset Pricing Model to determine the rate of return on the firms COMMON equity. (1 point)

3. Based on your results derived from the Dividend Discount and Capital Asset Pricing Models,

compute the average rate of return on the firms COMMON equity. (0.5 points)

4. Using the Capital Asset Pricing Model, and given the return on the market of 8%,

recalculate the rate of return on the firms COMMON equity. (1 point)

5. Adopt the Dividend Discount Model to estimate the rate of return on the firms PREFERRED equity. (0.5 points)

6. If the company does not use any debt in its financing, determine the market value of the firms ASSETS. (1 point)

7. Explain why the perpetuity formulas are used in finance value both PREFERRED and COMMON stocks.

Discuss what type of perpetuity formula is used for preferred stocks and which one for the common. (1 point)