BFIN 2201: BUSINESS FINANCE

Extra Credit

Estimate the cost of capital for Dr Pepper Snapple Group Inc.(NYSE:DPS) using two different methods. Follow all instructions given. Any time you see an X or instructions in bold, you should replace them with the answer. Instructions for how to embed an Excel Spreadsheet into a Word Document are at the end of the document. Show all of your work.

TEAM MEMBERS: X

1) Dividend Growth Model

a) What is the current annualdividend (D0)? On the Yahoo finance page follow the link for “Historical Prices” and then “Dividends Only.” This table can be exported into Excel to help you do calculations by clicking on “Download to Spreadsheet.”

Embed Excel Spreadsheet showing dividends for the last few years.

Current annual dividend = X

b) Determine the annual dividend for the past several years. Is there an approximate pattern to the dividends? Are the dividends constant, growing, or uneven?

X

c) If the dividends grow over time, find dividend growth (g).

g = X

d) Find the current stock price (P0).

P0 = X

e) Using the information above calculate the cost of equity using the constant dividend model or the dividend growth model or state that neither one can be used.

Cost of Equity = X

2) Capital Asset Pricing Model

a) Several sources list ß including Reuters, Google Finance, and Yahoo Finance. Find ß from 3 different sources. State which source you used. Why are the betas different from different sources?

Source 1 = X, ß = X

Source 2 = X, ß = X

Source 3 = X, ß = X

Reason why betas are different.

b) Estimate ß yourself.

i) From the Yahoo finance webpage, download the historical stock price of your company and use them to calculate returns.

Embed an Excel Spreadsheet showing the stock price and returns with only few lines showing.

ii) From the Yahoo finance webpage, download the historical price of the S&P 500 index to use as an approximation of market performance. Use the prices to find returns.

Embed an Excel Spreadsheet showing the stock price and returns with only few lines showing.

iii) Run a regression in which returns of the company are the dependent variable and S&P 500 index returns are the independent variable. Note: Your estimate of ß should be very similar to the ßs that you provided above. If it is very different, you are doing something wrong.

Show regression results.

ß = X

iv) Find Rf. What is the risk-free rate based on?

Rf= X

State the source of Rf

v) You can assume that Market Risk Premium is 6.1%. Using the information above, calculate the cost of equity using the CAPM.

Cost of Equity =

3) Based on your different estimates, what do you think that the cost of equity is?

Cost of Equity =

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