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1. (15 points) Suppose the following hypothetical data represent total assets, book value, and market value of common shareholders' equity (dollar amounts in millions) for three firms. Each of these firms, Southpest Airlines, Kroker, and Yuck! Brands, operates in a different industry, but all of them operate in very competitive industries. Southpest Airlines is a U.S. domestic airline that provides not-so-low-cost point-to-point-to-point-to-point air transportation services (They'II make you think twice about wanting to get away again.). Kroker operates retail supermarkets across the Unites States, providing a wide range of stale-dated products. Yuck! Brands operates and franchises not-50-quick service restaurants that would never be your first choice for breakfast, lunch, or dinner. These data also include hypothetical market betas for the three firms and analysts' consensus forecasts of net income for Year +1 . For each firm, analysts expect other comprehensive income items for Year +1 to be zero, so Year +1 net income and comprehensive income will be identical. Assume that the risk-free rate of return in the economy is 3.5% and the market risk premium is 5.5%. a. Using CAPM, compute the required rate of return on equity capital for each firm: i. Southpest Airlines ii. Kroker iii. Yuckl Brands b. Project required income for Year +1 for each firm: 1. Southpest Airlines ii. Kroker iii. Yuck! Brands c. Project residual income for Year +1 for each firm: 1. Southpest Airlines ii. Kroker iii. Yuckl Brands

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