This is a cost of capital assignment that I will need to study how the answers were derived,so formulas are very important. You will need to enable macros. Hints: The numbers are adjusted for stock splits. It does not affect your calculation. If you look at the historical prices of a stock that had stock splits, the actual stock prices before stock splits are not comparable to the prices after the split unless the prices are adjusted for the splits. Each firm has an unlevered cost of equity and unlevered equity beta regardless of D/E ratio of the firm and the unlevered cost of equity and beta do not changed even if D/E ratio changes. If D/E ratio changes, then the levered equity beta and the cost of debt will adjust to a new D/E ratio but the unlevered equity beta and the unlevered cost of equity remain the same. The reason why the unlevered cost of equity and beta remain the same is because the return (and risk) of on unlevered equity is also the return on assets (and risk) since all the return on assets belongs to the unlevered equity in its entirety. Hence, the unlevered cost of equity and beta remain constant even when debt/equity ratio changes.
Question 1: AMETEK, Inc. (AME) manufactures and sells electronic instruments and electromechanical devices in North America, Europe, Asia, and South America. The company operates in two segments, Electronic Instruments Group and Electromechanical Group. The dividend data for 2005 - 2011 is given below. The stock price was $42.86 at the end of 2011 and $18.19 at the end of 2005. Estimate the cost of equity for AMETEK at the end of 2011 using the Gordon formula. The dividends and stock prices are adjusted for stock splits.
Assume the future dividend growth rate is equal to the historical average between 2005 and 2011.
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AMETEK (AME)
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Year
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Dividend*
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Stock Price*
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2011
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$0.1600
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$42.86
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2010
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$0.0800
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2009
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$0.0711
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2008
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$0.0711
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2007
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$0.0711
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2006
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$0.0415
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2005
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$0.0316
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$18.19
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*adjusted for cummulative stock splits
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Answer:
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ke=
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Question 2: On August 30, 2012, the price and beta of AMETEK, Inc. (AME) stock are $34.25 and 1.1, respectively. The risk-free rate is assumed at 3% and the market risk premium at 6%. Estimate the cost of equity using CAPM.
CAPM Cost of Equity=
Question 3: The stock of a publicly traded firm with no debt has a beta of 1.2. The firm's credit rating is such that it can borrow at a 7% interest rate by issuing 10-year bonds. The firm plans to change its capital structure by issuing bonds to maintain a long-term debt-to-equity ratio of 50%. Estimate the weighted average cost of capital with the new capital structure.
Assume the market risk premium is 6%, the 10-year Treasury bond yield is 3%, and the corporate income tax rate is 40%.
Your answer: WACC
Question 4: Your financial analysis of a company forecasts the free cash flow for the next eight years as in the table below. The company is expected to achieve a steady state growth of 3% after the 8th year. The WACC for the company is estimated at 9%.
i) What is the PV of FCFs for years 1 through 8?
ii) What is the terminal value as of the year 0? (i.e., the PV as of now of FCFs for the year 9 and beyond)
iii) What is the value of the company?
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Year
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1
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2
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3
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4
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5
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6
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7
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8
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FCF ($mm)
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485
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500
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515
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530
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546
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562
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576
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596
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i)
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PV(FCF, 1~8)
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ii)
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PV(terminal value)
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iii)
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Value of the firm
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