102 103 10-4 105 106 “vo investors ae erating ATT sock for posible purchase. They agree on the expected {alae of Dyan alo onthe expected fur dvdend growsh rite. Further, they agree on the {anew of de sock However ons ieee normaly hold tock for 2 yes, while the other tommy hollsswxks for 1D seas. On the basis ofthe type of analysis done in hi chapter, thet Should both be wlng to pa the sme pric for ATCT stock. True o false? Explain [Abond that pays interest forever and has no maturity date is a perpetal bond. In what respect isa perpetual bond similar > = no-growth common stock, and toa share of preferred stock? {you bought a share of common stock, you would tially expet to resve dividends pls Capital uns Wal! sou expect the ditotion betwee dividend yield and capital grin tobe Jnhnencd y the fn: Secon pay more dividends rather than to ream and reavest more fi arin? Isic ue tar the folowing expresion can bese to find the vale ofa cnstant growth stock? Do Ree Ieis frequent acd thatthe primary parpese ofthe preemptive ight oallow individuals ‘mint te proportionate kare ofthe ownership and some! of coeparatcn 2. How imporsnt do you soppore this considerton i forthe averzgesacholer of 2 frm show hares ae aed on the New York or Armerian Stock Exchanges? b. Ith preampive ight lkedyt be of more importance to tckbolders of publicly owned or closely held firms? Explain. bost Sock oRowne pares [AND VALUATION You are considering buying the stocks of wo companies thet operat inthe sare industy; they have very simular characterises excep for thei dividend payout policies. Both companies are expected to eam S6 per share this year. However, Campany D (or “avidend”) is expected to avout allo ts earings a dividends, wile Company G (or “growth’) i expected to pay out Only ened ofits caring, oF 82 per share. Ds stock price ie S40. and D are ually risky Which of he following is ost ikely oe ve? 42 Company G wil havea faster growth sate than Company D. Therefore, G' stock price shoul be greater than $40 Although Gs growth sate shou exceed D, DS current dividend exceeds that of, and his should exase DS price t exceed G. «Am investor in Stock D will get his or her rmoney back faster because D pays out more ofits eamingssdsidends, Ths, na sense, D isle ashort-tem bond, and Gis ike «long-term bond. Therefore, ifeconomi shits cause kp and hw increase, and if he expected seas of dividends from D and G remain constant, both Stacks D and G will detine, but D's pice shoal decline further 4. Disexpeted and required eateof rerun si = ks = 15%. G expected return willbe higher because ofits higher expected growth rae «If we observe cht Gs price lao S40, che bes estimate of Gis growth rt is 10 percentst-2 constanr oRowti ‘STOCK VALUATION st3 SUPERNORMAL GREW ‘STOCK VAUSTON Problems 10-4 DPS CALCULATION 10-2 valuaTON 10-3 CONSTANT GROWTH VALUATION 10-4 [PREFERRED STOCK VALUATION 10-5 SUPERNORNAL GROWTH VALUATION ‘ 10-6 [CONSTANT GROWTH RATE, ' 10-7 ‘constant GROWTH VALUATION 10-8 PREFERRED STOCK RATE COP RETURN 10-9 econ GROWTH STOCK 10-10 RATES OF RETURN Ewald Company's current stock price is S36, and ix ast dividend was $240. In view of Ewald’s sarong financial postion and its consequent low rsk ts required rate of return is ony 1 per- ‘ent. Ifvidends are expected co grow ata constant =e. in the fature, and fk i expected to remain at 12 percent, whats Ewald expected stack pose 5 years from now? Snyder Compater Chips Inc. is experiencing a period o¥ rapid growth, Earnings and dividends are expected to grow at arate of 15 percent duting the sex: 2 years at 13 percent in the chird year, and ata constant rate of 6 percent thereafter. Snyders last dividend was S113, and the 1e- ‘quired rate of return on the stock is 12 percent. 42. Calculate the value ofthe stock today Bb, Calculate P, and P, ‘Calculate the dividend yield and capital gains yield for Years“ 2. and 3. ‘Warr Corporation just paid a dividend of $1.50 a share (cy Dy = Si 50), The dividend is ex pected to grow 5 percent year for the neve 3 yeas, and chen 10 percent a year thereafter. What fs the expected dividend per share foreach ofthe next 5 years? ‘Thomas Brothers is expected to pay 2 $0.50 per share dividend atthe end ofthe year Ge, Dy $0.50), The dividend is expecced to grow ata constant rate of ” percent a yeas, The required ‘ate of return on the sock. kis 15 percent. What is the value per share of the company’s toc Harrison Clothiers’ stock: currently sols for $20 share. The stock ust pid vidend of $1.00 a share (ie, Dp = $1.00). The dividend is expected to grow ata constant rate of 10 percent 2 year. What stock price is expeced 1 year from now? What i the required rate of return on the ‘companys stack? Fee Founders has preferred stock outstanding which pays dividend of $5 atthe end ofeach ‘The preferred stock els or $60 «share. Whatis the preferred stock’ required rate of return? A company currently pays a dividend of $2 per share, Dy = 2. Iie estimated thatthe company's dividend will grow at a rate of 20 percene per year for the next? years, thea the dividend will {grow ata constant rate of 7 percent thereafter, The company's stock has a beta equal to 1.2 the Fiske rate is 7.5 percent, and che marker risk premium is 4 percent. What would you est sate isthe stock’ current price A stock s trading ot $80 per share. The stock is expected to have a year-end dividend of $4 per share (Dj = 4), which is expectec :s grow a& some constant rae g throughout time, The stock’ reaquired rate of rerurnis 14 percene {ou are an analyst who believes in efficient markets, whet ‘would be your forecast of g? ‘You are considering an investment in the common stock of Keller Carp. The sock is expected to pay a dividend of $2 a share a the end ofthe year (D, = S2.00). The stock has a et equal to 0.9. The risk-free rate is 5.6 percent. and the market rsk premium i 6 percent. The stock’ div idend is expected to grow at some constant rate g, The stock currently sells for $25 a share. Aa- suming che market isin equilibrium. what does the market believe wil be the stock price at che end of 3 years? (Thats, what isP:*) ‘What will be the nominal rte of return on a preferred stock with a $100 par value a stated dividend of 8 percent of par, anda current market price of (3) $60, (b) $80, (e) $100, and (a sis0? ‘Martell Mining Company's ore reserves are being depleted, so is sales ar falling. Alo, its pit is _geting deeper each year, so its costs are rising. As a reslt the company’s earnings and divi- ddends are declining atthe constant rate ofS percent per yea. If Dy = $5 and k, ~ 15%, what is the salue of Martell Mining’ stock? ‘The beta coefficient for Stock C is be ~ 0, whereas tat for Stock D is by = 0.5. (Stock D's beta is negative, indicating thae its rate of recur rises whenever returns on most other stocks fall. There are very few negative beta stocks, although collection agency stocks are sometimes cited as an example.)