BWFF1013 FOUNDATIONS OF FINANCE

TOPIC 5: STOCK VALUATION EXERCISE 1 1. What is the value of a preferred stock where the dividend rate is 16 percent on a RM100 par value? The appropriate discount rate for a stock of this risk level is 12 percent. 2. You own 250 shares of Dalta Bhds preferred stock, which is currently selling for RM38.50 per share and pays quarterly dividend of RM1.25 per share. a. What is the expected rate of return? b. If you require an 8 percent return, will you buy more stock or sell the stock, given the current price? Why? 3. Cosy Bhd common stock has just paid a dividend of RM1.32 and is expected to grow indefinitely at an annual 7 percent rate. What is the value of the stock if you require an 11 percent return? 4. Black & White Co. common stock currently sells for RM23 per share. The companys executives anticipate a constant growth rate of 10.5 percent and an end of year dividend of RM2.50. a. What is your expected rate of return? b. If you require a 17 percent return, will you purchase the stock? Why? 5. You are considering a preferred stock where the dividend is 14 percent on a RM100 par value. Calculate the following. a. The fair value of the preferred stock if you require a return of 7 percent. b. The expected rate of return if the current market price is RM189.80. 6. Coco Bhds common stock will pay a dividend of RM2 at the end of this year and is expected to grow indefinitely at an annual 7 percent rate. What is the value of the stock if you require a 12 percent return? What is your expected rate of return if the stock is sold in the market at RM35 per share? Will you buy the stock? Why? 7. The current dividend on a stock is $2 per share and investors require a rate of return of 12%. Dividends are expected to grow at a rate of 20% per year over the next three years and then at a rate of 5% per year from that point on. Find the price of the stock. 8. A stock with a required rate of return of 10 percent sells for $30 per share. The stocks dividend is expected to grow at a constant rate of percent per year. What is the expected yearend dividend, D1, on the stock? 9. Allegheny Publishings stock is expected to pay a year-end dividend, D1, of $4.00. The dividend is expected to grow at a constant rate of 8 percent per year, and the stocks required rate of return is 12 percent. Given this information, what is the expected price of the stock, eight years from now?

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BWFF1013 FOUNDATIONS OF FINANCE

10. Antiques R Us is a mature manufacturing firm. The company just paid a $7 dividend, but management expects to reduce the payout by 5 percent per year, indefinitely. If you require a 10 percent return on this stock, what will you pay for a share today? 11. Barnard Corp. will pay a dividend of $3.05 next year. The company has stated that it will maintain a constant growth rate of 5 percent a year forever. A required rate of return is 15%. a. How much will you pay for the stock? b. What if you want a 10 percent rate of return? c. What does this tell you about the relationship between the required return and the stock price? 12. A stock you are evaluating paid a dividend at the end of last year of $3.50. Dividends have grown at a constant rate of 2 percent per year over the last 20 years, and this constant growth rate is expected to continue into the future. The required rate of return on the stock is 10 percent. What is the price for the stock? 13. Stability Inc. has maintained a dividend rate of $4.50 per share for many years. The same rate is expected to be paid in future years. If investors require an 11% rate of return on similar investments, determine the present value of the companys stock.

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