The CEO of All-Funders PLC would like to present the valuation of the business to potential...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
The CEO of All-Funders PLC would like to present the valuation of the business to potential investors. He has made the following estimates concerning the annual returns on the company's assets under possible economic conditions: Annual rate of returns (%) Probability a. Using the above annual returns distribution for the assets, calculate the Expected rate of return Standard deviation Interpret your result for the standard deviation ii. i. Pessimistic 2 0.2 i. Most likely 5 0.5 ii. Optimistic 8 0.3 b. The directors of the company were recently paid a dividend of $5 for each unquoted shares held. The projected growth rate for dividends is 5% for the foreseeable future. Assuming the expected rate of return in (a)(i) is the investors' required rate of return, using the dividend discount method, calculate the value for each share price. (4 marks) (2 marks) (4 marks) (2 marks) c. The CEO was recently informed of an alternative approach to business valuation, using the Capital Asset Pricing Model (CAPM). She was informed the required return of investors could be determined with the following information: 6-monthUS Treasury Bill rate is 1.88% The average S&P 500 index return is 9.55% Equivalent industry beta is 0.88 Calculate the required rate of return of investors using the CAPM model. Using the required rate of return form (c) (i), calculate the value of each share (3 marks) (4 marks) d. Discuss THREE advantage of using CAPM valuation over Dividend Discount valuation. Citations and refernces required from academic journals. (6 marks) The CEO of All-Funders PLC would like to present the valuation of the business to potential investors. He has made the following estimates concerning the annual returns on the company's assets under possible economic conditions: Annual rate of returns (%) Probability a. Using the above annual returns distribution for the assets, calculate the Expected rate of return Standard deviation Interpret your result for the standard deviation ii. i. Pessimistic 2 0.2 i. Most likely 5 0.5 ii. Optimistic 8 0.3 b. The directors of the company were recently paid a dividend of $5 for each unquoted shares held. The projected growth rate for dividends is 5% for the foreseeable future. Assuming the expected rate of return in (a)(i) is the investors' required rate of return, using the dividend discount method, calculate the value for each share price. (4 marks) (2 marks) (4 marks) (2 marks) c. The CEO was recently informed of an alternative approach to business valuation, using the Capital Asset Pricing Model (CAPM). She was informed the required return of investors could be determined with the following information: 6-monthUS Treasury Bill rate is 1.88% The average S&P 500 index return is 9.55% Equivalent industry beta is 0.88 Calculate the required rate of return of investors using the CAPM model. Using the required rate of return form (c) (i), calculate the value of each share (3 marks) (4 marks) d. Discuss THREE advantage of using CAPM valuation over Dividend Discount valuation. Citations and refernces required from academic journals. (6 marks)
Expert Answer:
Answer rating: 100% (QA)
a i Expected rate of return To calculate the expected rate of return we multiply each rate of return by its corresponding probability and sum the results Expected rate of return Pessimistic return Pes... View the full answer
Related Book For
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1337614689
9th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Posted Date:
Students also viewed these accounting questions
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
The Crazy Eddie fraud may appear smaller and gentler than the massive billion-dollar frauds exposed in recent times, such as Bernie Madoffs Ponzi scheme, frauds in the subprime mortgage market, the...
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
1. Two football fans are listening to the Grey Cup game on the radio, one in Montreal, where the game is being played, the other in Vancouver, 3692 km away. How much sooner does the Montreal fan hear...
-
In order to raise the starting torque, the single-phase induction motor of Problem 9.13 is to be converted to a capacitor-start, capacitor-run motor. Write a MATLAB script to find the minimum value...
-
Using Maxwell's relation, prove that \[ \left(\frac{\partial S}{\partial V} ight)_{T}=\left(\frac{\partial P}{\partial T} ight)_{V}=\frac{\beta}{\alpha} \]
-
Find the = 0.05 critical value for the chi-square distribution with 18 degrees of freedom.
-
From the data in Table 14-2 in the text calculate the average annual inflation rate as measured by the CPI for the following years: (a) End of 1973 to end of 1982 (b) End of 1980 to end of 1989 (c)...
-
Balance Sheet Nicole Corporation\'s year - end 2 0 1 9 balance sheet lists current assets of $ 7 3 8 , 0 0 0 , fixed assets of $ 5 9 0 , 0 0 0 , current liabilities of $ 5 3 2 , 0 0 0 , and long -...
-
Today is May 15, 2000, and the current, semi-annually compounded yield curve is in Table 3.6. Compute the duration for the following securities: (a) 3-year zero coupon bond (b) 3 1/4-year coupon bond...
-
Design a buck-boost converter that has a source that varies from 10 to 14 V. The output is regulated at 12 V. The load varies from 10 to 15 W. The output voltage ripple must be less than 1 percent...
-
Case: You are applying to the "PSB Leadership Bursary" at Sheridan College[1]. This bursary is awarded to students in the Pilon School of Business (PSB) who show exceptional promise in one or more of...
-
Read in its entirety the article "What Tina Fey Would Do for a SoyJoy" by Emily Nussbaum (online). After reading the article, respond to the question below using examples from the article to support...
-
Use the following prompts as sections in your paper Of the career paths you have researched, which two paths are you most interested in learning more about at this time? What are the major...
-
A car travels 35.0 meters in the first 10.0 seconds of a trip and 25.0 meters in the next 10.0 seconds of the trip. What is the average speed of the car in miles per hour for the total trip?
-
The Work in Process - Finishing account for a company shows the following: WORK IN PROCESS INVENTORY-FINISHING 6/1 Balance 9,200 6/30 Transferred out ? 6/1 Materials 2,000 6/30 Labor 4,160 6/30...
-
You have a same-sex family, Adele and Kim in your center who have a 4-year-old, Thomas, and a 1-year-old Lillian. Adele comes to you to state that their four-year-old had come home crying that...
-
Should U.S. antidumping laws be stated in terms of average total costs or average variable costs?
-
If the firm borrows capital from a bank and invests it in assets that earn a return greater than the interest rate charged by the bank, what effect will that have on residual income for the firm? How...
-
Three years of combined data for two firms appear below (in millions). One of these firms is FedEx, a relatively high-growth firm that provides courier services, and the other is Kellogg Company, a...
-
Why is it appropriate to use the required rate of return on equity capital (rather than the weighted average cost of capital) as the discount rate in the residual income valuation approach?
-
The following table presents prices, in thousands of dollars, of single-family homes for some of the largest metropolitan areas in the United States for the third quarter of 2015 and the third...
-
Following are the closing prices of Google stock for each trading day in May and June of a recent year. a. Find the mean and median price in May. b. Find the mean and median price in June. c. Does...
-
Following are the weights, in pounds, for offensive and defensive linemen on the New York Giants National Football League team at the beginning of a recent year. a. Find the mean and median weight...
Study smarter with the SolutionInn App