Employing the constant growth dividend discount model

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Reference no: EM131354014

1. Pan American Airlines' shares are currently trading at $55.82 each. The market yield on Pan Am's debt is 4% and the firm's beta is 1.2. The T-Bill rate is 3.75% and the expected return on the market is 8.75%. The? company's target capital structure is 40% debt and 60% equity. Pan American Airlines pays a combined federal and state tax rate of 25%. What is the estimated cost of common equity, employing the constant growth dividend discount model Assume that Pan Am pays annual dividends and that the last dividend of $2.23 per share was paid yesterday. Pan Am started paying dividends 6 years ago. The first dividend was $1.27 per share.

Employing the constant growth dividend discount model, the estimated cost of common equity for Pan Am is_____. ?(Round to two decimal places.)

2. Gamecocks Inc.'s free cash flow to the firm (FCFF) was $20 million in its most recent fiscal year that just ended. The company's FCFF is expected to grow steadily at 3% per year in perpetuity. The company's weighted average cost of capital is 10.5%.The market value of the company's debt equals 31?% of its total value and the rest is the value of its common stock. If Gamecocks has 10 million common shares outstanding, whatis the value of each share?

(Hint:Step 1: Find the discounted value of the firm's FCFFs using the constant-growth model with WACC as the discount rate.

Step 2: Subtract the value of debt to find the value of common stock.

Step 3: Divide by the total number of shares outstanding to find the price per share)

The price of each share is____(round to the nearest cent)

Reference no: EM131354014

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Employing the constant growth dividend discount model : Pan American Airlines' shares are currently trading at $55.82 each. The market yield on Pan Am's debt is 4% and the firm's beta is 1.2. The T-Bill rate is 3.75 % and the expected return on the market is 8.75%. The company's target capital structure i..

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