Harbour Corporation pays a dividend of $2.15 per year,which is expected to grow at a rate of 3% per year.Harbour has a cost of capital of 12%,and an EPS of $4.42.Its competitor,Pallantine Inc.,pays a yearly dividend of $1.25 per year,which is expected to grow at a rate of 6% per year.Pallantine has an EPS of $5.19.Solve for Pallantine's cost of capital using the method of comparables.

Question

Quizplus · Accepted Answer

The method of comparables involves using the valuation metrics of a similar company to estimate the value of another. Here, we use Harbour Corporation's data to estimate Pallantine Inc.'s cost of capital. Harbour's dividend growth model (DGM) valuation is given by $P_0 = \frac{D_0(1+g)}{r-g}$, where $P_0$ is the price, $D_0$ is the current dividend, $g$ is the growth rate, and $r$ is the cost of capital (or required rate of return). Given Harbour's cost of capital is 12%, dividend of $2.15, and growth of 3%, we can infer that its valuation metrics reflect a company with these parameters. Applying the same logic to Pallantine, but solving for its cost of capital with its dividend of $1.25 and growth of 6%, we aim to maintain the same valuation perspective. However, without Harbour's price or Pallantine's price, direct application of the DGM formula is not possible. Instead, the method of comparables suggests using the relative metrics (dividend, growth rate, and cost of capital) to estimate Pallantine's cost of capital by analogy, implying a similar relationship between these variables. Given the lack of direct formula application or specific numerical calculation steps provided in the question, the correct answer involves understanding the conceptual approach rather than a detailed calculation. Thus, the answer is inferred based on the information given, which is insufficient for a precise calculation but suggests an analogy-based estimation.

Harbour Corporation Pays a Dividend of $2