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Fundamentals of Corporate Finance, 4/c/e

Fundamentals of Corporate Finance, 4/e

Stephen A. Ross, Massachusetts Institute of Technology
Randolph W. Westerfield, University of Southern California
Bradford D. Jordan, University of Kentucky
Gordon S. Roberts, York University

Cost of Capital

Internet Application Questions


1		The cost of equity financing is difficult to estimate because equity cash flows are uncertain. Even dividends for traditionally big-payout companies such as AT&T can suddenly disappear, as in December 2000, when AT&T cut its dividends by almost 80 percent. Based on AT&T's dividend records for 108 years (1893–2000), and its stock price history during this time, what would be your estimate of AT&T's cost of equity in 1900? 1950? 2000? How does survivorship — the fact that you are looking at more than 100 years of dividends means that AT&T survived that long — affect your estimate?



2		Initial Public Offerings of equity are not everyone's investments. While some IPOs have generated spectacular return on the first day of trading, the variation across IPOs is large. Go to the following site and pick five recent IPOs with the highest first day returns. http://www.hoovers.com/ipo/ How are these IPOs performing today? If you had bought in at the close of first day of trading, what would your return be based on the most recent price for these stocks?



3		The power sector in Canada is undergoing rapid changes, mainly in the form of deregulation and separation of generation from distribution of energy. TransAlta is the largest non-regulated electricity generation company in Canada. Its website clearly lists its financial goals for the intermediate future. Based on the numbers provided on the company's website, what is your estimate of TransAlta's cost of equity capital?

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