Reference no: EM132432761

Question 1: Your firm is considering expanding its household products division. You identify Procter & Gamble (PG) as a firm with comparable investments. Suppose PG's equity has a market capitalisation of $144 billion and a beta of 0.57. PG also has $37 billion of AA-rated (beta of 0.01) debt outstanding, with an average yield of 3.1%. Estimate the cost of capital of your firm's investment given a risk-free rate of 3% and a market risk-premium of 5%.

Question 2: Dren Industries is considering expanding into a new product line. Earnings per share are expected to be $5 and are expected to grow annually at 5% without the new product line but growth would increase to 7% if the new product line is introduced. To finance the expansion, Dren would need to cut its dividend payout ratio from 80% to 50%. If Dren's equity cost of capital is 11%, what would be the impact on Dren's stock price if they introduce the new product line? Assume the equity cost of capital will remain unchanged.

Question 3: Titan Industries has 217 million shares outstanding and expects earnings at the end of this year of $860 million. Titan plans to pay out 50% of its earnings in total, paying 30% as a dividend and using 20% to repurchase shares. If Titan's earnings are expected to grow by 7.5% per year and these payout rates remain constant, determine Titan's share price assuming an equity cost of capital of 10%.

Question 4: Suppose FitOne Company will pay a dividend this year of $3.50 per share. Its equity cost of capital is 12%, and you expect its dividends to grow at a rate of about 3% per year, though you are somewhat unsure of the precise growth rate. - If FitOne's stock is currently trading for $45.00 per share, how would you update your beliefs about its dividend growth rate?