Reference no: EM132433995

i) 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%.

ii) 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.

iii) 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%.

iv) 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?