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Market Value and Rankings

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Firm Dividend Cost of Capital
($ million) %/Year
S1 10 8
S2 10 12
S3 10 14
B1 100 8
B2 100 12
B3 100 14

a. Calculate market value of each firm using cost of cap.

b. Rank 3 S by market value & note how cost of cap is ordered.
What is the expected return for a self financing portfolio.

c. Rank all 6 firms by their market values
How does this ranking order the cost of capital?
What would be the expected return for a self financing portfolio.

d. Repeat part © but rank the firms by the dividend yield instead of the market value. What can you conclude about the dividend yield ranking compared to the market value ranking?

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Solution Summary

The dividend yield ranking is depicted compared to the market value ranking.

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