Assumptions:
• The CAPM holds, the risk-free rate is 3% and the expected market risk premium is 8%
• Markets are efficient, and there are no taxes or other frictions
• Company XYZ is a mature firm in a mature sector with zero expected growth and pays out all of its net income to its shareholders via dividends
–Assume XYZ expected NCF (from enterprise) is $200 over the next year and its enterprise beta is 2.125
–Assume XYZ carries $500 excess cash, which earns the risk-free rate
• XYZ is currently 100% financed with equity and has 100 shares outstanding
Question: Given this information above, what is your estimate of XYZ’s…
(i) equity beta?
(ii) expected return on equity?
(iii) stock price?
(iv) expected dividend payment to shareholders next year?
(v) corporate value?
(vi) cost of capital?