a. Briefly explain how to estimate equity beta using a regression approach and figure out potential problems when estimating beta.
b. Suppose the current price of one company is $25. Another company has just announced that it wants to buy the company by $35 per share to acquire all stocks of the company. The company’s management begins fighting off this hostile bid. Is management acting in the shareholders’ best interests? Why or why not?
c. One company’s current dividend was $2.05 per share, and dividends are expected to grow at an annual rate of 4.1% indefinitely. At the same time, the company industry has a beta of 0.95. the market risk premium is 7%, and T-bills are currently yielding 3.6%. If the stock of the company sells for $39 per share now, what is your estimate of the cost of equity for this firm?
d. One company is considering one project that will cost $23,000 now and will result in after-tax cash flow of $2.1 million at the end of first year and these cash flows will grow at 2% per year indefinitely. The firm has a debt-equity ratio of 0.8, a cost of equity of 11%, and an after-tax cost of debt of 4.6%. This new project is somewhat riskier than the usual project the firm undertakes. Thus, management team decides to discount cash flows of the project by applying an adjustment factor of +3% to the cost of capital of the firm. Should the firm take on this project?
