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STOCK VALUATION Tutorial 5

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Question 1 You bought a share of 5 percent preferred stock for ￡ 84.12 last year. The market price for your stock is now ￡ 80.27. what is your total dollar return and percentage return for last year? Answer: Dollar return= ￡ 1.15 Percentage Return=1.4 percent

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Question 2 You intend to purchase Marigo common stock at $50 per share, hold it 1 year, and then sell it after a dividend of $6 is paid. How much will the stock price have to appreciate for you to satisfy your required rate of return of 15%? Answer: P 1 =$51.50

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Question 3 Gruber Corp. pays a constant $12 dividend on its stock. The company will maintain this dividend for the next eight years and will then cease paying dividend forever. If the required return on this stock is 10 percent, what is the current share price? P o =$64

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Question 4 The Sing Co has just paid a cash dividend of $2 per share. Investors require a 16 percent return from investments such as this. If the dividend is expected to grow at a steady 8% per year, what is the current value of the stock? What will the stock be worth in five years? P o =$27, P 5 =$39.67

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Question 5 Suppose a stock selling for $40 per share. The next dividend will be $1 per share, and you think the dividend will grow at 12% per year forever. What is the dividend yield in this case? Also calculate the total required return. Div Yield=2.5%, r=14.5%

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Question 6 Honeywag common stock is expected to pay $1.85 in dividends next year, and the market price is projected to be $42.50 per share by year-end. If investors require a rate of return of 11 percent, what is the current value of the stock? V=$39.95

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Question 7 Chain Reaction, Inc., has been growing at a phenomenal rate of 30% per year because of its rapid expansion and explosive sales. You believe that this growth rate will last for three more years and that the rate will then drop to 10 percent per year. If the growth rate then remains at 10% indefinitely, what is the total value of the stock? Total dividends just paid were $5 million, and the required return is 20%. V=$87.57

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Question 8 Suppose an investor is considering the purchase of a share of the Utah Mining Company. The stock will pay a $3 dividend a year from today. This dividend is expected to grow at 10% per year (g=10%) for the foreseeable future. The investor thinks that the required return (r) on this stock is 15%, given her assessment of Utah Mining’s risk. What is the value of a share of Utah Mining Company’s stock? Answer: V=$60

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Question 9 Consider the valuation of an ordinary share that paid a $2 dividend at the end of the last year and is expected to pay a cash dividend every year from now to infinity. Each year the dividends are expected to grow at a rate of 10%. Based on an assessment of the riskiness of the shares, the investor’s required rate of return is 15%. Using this information, compute the value of the ordinary share. V=$44

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Question 10 J&J had a return on equity of 19.47 percent. The firm’s earnings per share was $4.63 and it paid $1.87 in dividends per share. If these relationships hold in the future, what will be the firm’s internal growth rate? Answer: g=11.6%

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