Yeats Valves

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ten found by using the Capital Asset Pricing Model (CAPM). Because the beta for Yeats is not known, the pure play method should be employed by using the Hamada equation to compare industry unlevered betas. Using this method, a beta of 0.70 would be a good estimate because it is based on the premise that Yeats has little or no long-term debt and is comparable to the industry standard. Assuming a risk-free rate from the 3-month T-Bill of 6.6% and an arithmetic risk premium of 7.2%, the discount rate for Yeats would be 11.7% under the CAPM approach. (Exhibit A)
The other way to compute the required rate is by using the Dividend Discount Model (DDM). For this approach, we ran regression on past sales data for Yeats, and used our current estimated dividend of $1.96. In addition, a stock price of $32.90 was considered the equilibrium market price. Although shares recently closed at a higher figure, $32.90 seems to be a good measure of the market stock price given recent volatility levels due to trading. Under this method, the required rate is 14.64%. (Exhibit B) Because both models are useful and are based of reasonable assumptions, a simple average of the two provides a WA...