A large European, debt-free company has an estimated equity beta of 1.4. The risk-free rate and the market risk premium in the company’s home country are 4 percent and 5 percent, respectively. This company’s cost of equity is
5 percent
9 percent
11 percent
12 percent
Some researchers argue that the firm size effect on the cost of equity capital has disappeared. This would imply that
The cost of equity capital of small firms is no longer systematically lower than that of large firms.
The equity beta of small firms is no longer systematically greater than that of large firms.
The equity beta of small firms is no longer systematically lower than that of large firms.
None of the above
Company A’s market values of net debt and equity are €150 and €200, respectively. The company has a statutory and effective tax rate of 30 percent, an equity beta of 1.5 and an infinitely low probability of bankruptcy. Based on this information, company A’s asset beta is
0.86
0.98
1.01
2.29
Company B’s current equity beta, debt beta, and cost of equity are 1.6, 1.0 and 12 percent, respectively. The current (and expected future) tax rate and risk-free rate are 35 percent and 4 percent, respectively. Company B currently has a net debt-to-equity ratio of 50 percent. The company plans to increase its net debt-to-equity ratio to 100 percent (leaving its debt beta unchanged). After this increase in leverage, company B’s cost of equity will be
10.04 percent
12.00 percent
13.96 percent
20.00 percent
Company C’s cost of equity and cost of debt are 12 and 8 percent, respectively. The current tax rate is 40 percent. Company C has a net debt-to-equity ratio of 50 percent. Company C’s weighted average cost of capital is
8.40 percent
9.60 percent
10.00 percent
10.67 percent
An analyst produces the following series of annual dividend forecasts for company D: Expected dividend (end of) year t+1 = €10; Expected dividend (end of) year t+2 = €20; Expected dividend (end of) year t+3 = €10. The analyst further expects that company D’s dividends will grow indefinitely at a rate of 2 percent after year t+3. Company D’s cost of equity equals 10 percent. Under these assumptions, the analyst’s estimate of company D’s equity value at the end of year t is
€128.93
€120.22
€108.26
€36.36
€307.96
€443.20
€458.23
€507.96
€142.75
€385.90
€413.22
€512.70
Consider the following information about company G’s performance and financial position in year t and t+1:
- Net profit year t = €60; net profit year t+1 = €80 - Beginning book value of equity year t = €900 - Dividend year t = €20; dividend year t+1 = €50 - Cost of equity = 10 percent
If an analyst assumes that company G’s abnormal earnings will be zero in year t+2 and beyond, her estimate of the company’s terminal (equity) value at the end of year t+1 under the abnormal earnings growth valuation method is
€0
€14
(€140)
€140
Consider the following information about company G’s performance and financial position in year t and t+1:
- Net profit year t = €60; net profit year t+1 = €80 - Beginning book value of equity year t = €900 - Dividend year t = €20; dividend year t+1 = €50 - Cost of equity = 10 percent
If an analyst assumes that company G’s abnormal earnings will remain constant in year t+2 and beyond, her estimate of the company’s terminal (equity) value at the end of year t+1 under the abnormal earnings growth valuation method is