PRINCIPLES OF FINANCE | Tutorial

Tutorial 4b : Stock Valuation

1. Differentiate between primary and secondary market

2. Differentiate between common stock and preferred stock.
3. Favored stock will pay a dividend this year of $2.40 per share. Its dividend yield
is 8%. At what price is
4. Steady As She Goes Inc. will pay a year-end dividend of $3 per share.
Investors expect the dividend to grow at a rate of 4% indefinitely.
a. If the stock currently sells for $30 per share, what is the expected rate of
return on the stock?

b. If the expected rate of return on the stock is 16.5%, what is the stock price?

5. Integrated Potato Chips paid a $1 per share dividend yesterday. You expect
the dividend to grow steadily at a rate of 4% per year.
a. What is the expected dividend in each of the next 3 years?

b. If the discount rate for the stock is 12%, at what price will the stock sell?

6. Arts and Crafts Inc. will pay a dividend of $5 per share in 1 year. It sells at $50
a share, and firms in the same industry provide an expected rate of return of
14%. What must be the expected growth rate of the company's dividends?

7. Gentleman Gym just paid its annual dividend of $3 per share, and it is widely
expected that the dividend will increase by 5% per year indefinitely.
a. What price should the stock sell at? The discount rate is 15%.

b. How would your answer change if the discount rate were only 12%?

8. You believe that the Non-stick Gum Factory will pay a dividend of $2 on its
common stock next year. Thereafter, you expect dividends to grow at a rate of
6% a year in perpetuity. If you require a return of 12% on your investment, how
much should you be prepared to pay for the stock?

9. Current forecasts are for XYZ Company to pay dividends of $4, $4.25, and
$3.50 over the next three years, respectively. At the end of three years you
anticipate selling your stock at a market price of $100. What is the price of the
stock given a 15% expected return?