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Valuation
Measuring and Managing the Value of Companies
5th Edition
Chapter 11 Solutions
Estimating the Cost of Capital
Version 1.0
April 1, 2010
Chapter 11
Questions 1 & 2
Market Cost of Tax Aer-tax Weighted
Source of capital value capital rate cost cost
Market capitalization
Question 2 Capital structure changes
.Market Cost of Tax Aer-tax Weighted Shares
Source of capital value capital rate cost cost Debt Equity Price
Debt 300 8.0% 30.0% 5.6% 2.6% Original 100.0 500.0 20.0 25.0
Unlevered beta
Risk-free rate 7.0% Original beta 0.70
Question 1
Key inputs
Outstanding
Key inputs
Chapter 11
Question 3
Commentary
Chapter 11
Question 4
Price-to-earnings ratio 11.1
Return on equity 13.5%
Long-run growth in cash Eow 6.7%
Implied cost of equity 11.2%
In Chapter 11, ke is estimated using:
Key inputs
ROE
-1Earningsbecause
Price
ROE
-1Earnings g
CFg
g
k
ee
Chapter 11
Question 5
Company Market
Month 1 1.3% 1.0%
Month 2 2.0% 1.2%
Month 3 5.0% 3.4% 0.89
Month 4 –1.0% 0.3% 0.79
Month 5 –1.4% –0.6% 0.77
Month 6 2.2% 3.7% Standard error 0.01
Month 7 6.1% 4.8% Observations 12
Month 8 0.3% –2.3%
Month 9 –4.0% –4.5% ANOVA
Month 10 3.8% 3.9% df SS MS F
Month 11 –1.2% –1.3% Regression 1 0.007 0.01 38.75
Month 12 1.8% Residual 10 0.002 –
Total 11 0.009
Average 2.96% 2.51%
Volatility 2.14% 1.64%
Coefficients
Standard error
t-Stat P-value
Intercept – – 0.49 0.63
0.93 0.15 6.22 –
Summary output
Regression statistics
Multiple R
R-squared
Adjusted R-Squared
–
¥ Variable 1
-6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
Regression Data
Chapter 11
Question 6
Market price Solutions
Promised .nal cash /ow
Expected .nal cash /ow
