Finance Chapter 8 problems

Zimmer's common stock sells for $37 and its dividend is expected to grow at a rate of 8 percent annually. What is the expected dividend (D1) if Zimmer is returning 16%?

$37 = D1 / (.16 - .08) D1 = $2.96

The stock of Music City Inc. is selling for $37.50. The firm recently paid a dividend of $1.10. What is its implied constant growth rate if the market return is 14 percent?

$37.50 = $1.10(1 + g)/ (.14 - g) g = 10.75%

Find the return on a share of preferred stock that pays $3.90 per year given a market price of $30.00 per share.

3.90/30= 13%

Find the value of a share of preferred stock that pays $6.00 per year given a return of 16%.

6/.16 = $37.50

The common stock of Kyocera currently sells for $88.50 and its last (D0) dividend was $1.10. Determine the implied constant growth rate for Kyocera assuming it returns 14%.

88.50=1.10(1+g)/(.14-g) g = 12.6%

What is the rate of return on a preferred stock that has a par value of $50, a market price of $46.50, and a dividend of $4.10?

kp = Dp/P = $4.10 / $46.50 = .0882 = 8.82%

Williamson metal inc paid a dividend last year of $3 and is expecting dividends to grow at an 18% rate in years 1 and 2 followed by constant growth of 6% per year thereafter. similar stocks return 12% calculate the value of the stock today

ANS: A D1 = 3(1.18) = 3.54 D2 = 3.54(1.18) = 4.18 P2 = (4.18(1.06))/.06= 73.85 4.18 + 73.85=78.03 Calculator Steps: CFo=0, C01=3.54, C02=78.03; NPV: I = 12 NPV = $65.37

Morton Industries' common stock sells for $54. Dividends are expected to continue to grow at a rate of 8% annually. If Morton returns 13%, what was its most recent dividend?

D0 = $2.50

Frazier Inc. paid a dividend of $4 last year (D0). The firm is expecting dividends to grow at 21% in years 1-2 and 10% in Year 3. After that growth will be constant at 8% per year. Similar investments return 14%. Calculate the value of the stock today.

D1 = 4(1.21) = 4.84 D2 = 4.84(1.21) = 5.86 D3 = 5.86(1.10) = 6.45 P3 = (6.45(1.08))/(.14-.08) = 116.10 6.45 + 116.10 = 122.55 Calculator Steps: CFo=0, C01=4.84, C02=5.86, C03=122.55; NPV: I = 14 NPV = $91.47

Static Inc. has had a hard time recently. In order to help the firm survive a downturn in the market for its products, management has announced that it doesn't plan to pay dividends for the next three years. A modest dividend of $2.00 is projected for the fourth year after which dividends are expected to grow at 5% indefinitely. Similar stocks return 10%. How much should Static's stock sell for today?

P3=2.00/(.10-.05)=40 P0=40(.7513) = $30.05

Fast Wheels, Inc. expects to pay an annual dividend of $0.72 next year. Dividends have been growing at a compound annual rate of 6 percent and are expected to continue growing at that rate. What is the value of a share of Fast Wheels if similar stocks return 14 percent?

P0 = $.72 / (.14 - .06) = $9.00

What is the value of a share of Henley Inc. to an investor who requires a 12 percent rate of return if Henley's last dividend was $1.20? Assume earnings and dividends are expected to grow indefinitely at a rate of 7% per year.

P0 = $1.20(1.07)/(.12-.07) = $25.68

Zero-Sum Enterprise pays an annual dividend of $1.40 per share and neither earnings nor dividends are expected to grow in the future. What is the value of Zero-Sum's stock to an investor who requires a 14 percent rate of return?

P0 = $1.40/.14 = $10

Assume that the dividend on Central Power Company's $3.25 preferred stock issue is paid annually at the end of the year. Determine the price of this issue if its return is 12%.

P0 = $3.25 / .12 = $27.08

An Allied Northern preferred stock pays a $3.84 annual dividend. What is the value of the stock at a 9.5 percent return?

P0 = $3.84 / .095 = $40.42

Charlie Company is expected to grow at an annual rate of 6% indefinitely. The return on similar stocks is currently 11%. Charlie's board of directors declared a dividend of $1.85 yesterday. What should a share of Charlie Company sell for?

P0 = D0(1+g)/(k-g) = 1.85(1.06)/(.11-.06) = $39.22

Toys-r-Cool Inc.'s constant growth stock's last dividend was $1.50. It is selling for $30.20 in a market in which similar stocks return 12%. Calculate the stock's anticipated growth rate.Toys-r-Cool Inc.'s constant growth stock's last dividend was $1.50. It is selling for $30.20 in a market in which similar stocks return 12%. Calculate the stock's anticipated growth rate.

P0 = D0(1+g)/k-g 30.20 = (1.50(1+g))/(.12-g) g = 6.7%

Alpha issued a 6% preferred stock 15 years ago (par value $100). What is it selling for today if the relevant rate of return is now 9%?

PP = 6/.09 = $66.67

a share of stock is currently selling for $20.80. If the dividend just paid is $2.00 and investors are seeking a 14% return, what is the anticipated rate of constant growth?

Po=Do(1+g)/(k-g) 20.80=2(1+g)/(.14-g) g= 4%

a share of stock is currently selling for $31.80. if the anticipated constant growth rate for dividends is 6% and investors are seeking a 16% return, what is the dividend just paid?

Po=Do(1+g)/(k-g) 31.80=Do(1+g)/(.16-g) Do=$3

Analysts expect a stock to be selling for $22 in one yr. it is also expected to pay a $1 dividend during the yr. if you require a 15% return on this kind of investment, what is the most you can pay for the stock today

[(22-Po)+1]/Po=.15 Po=$20

The price of a share of stock today is $50.00, and the projected selling price in one year is $55.00. the estimated dividend during the yr is $1.00 the expected return on the stock is..

[(55-50)+1]/50 =12%

The price of a share of stock today is $25.00. if the return on the share is estimated at 18 % and the stock generally pays a dividend of $1 per yr, what is its projected selling price in one yr?

[(P1-25)+1]/25=.18 p1=$28.50

You are considering the purchase of Sanders Corp., a constant growth stock. the stock paid a recent dividend of $3.00. The next dividend is expected to be $3.18. if the stock is returning 15%,calculate its dividend yield

g= (3.18-3.00)/3.00= .06= 6% The 6% is the capital gains yield k=dividend yield +capital gains yield 15%=dividend yield+ 6% dividend yield= 9%

Frazier Enterprises stock is selling for $45 today. you are expecting a dividend of $4 next yr and a capital gains yield of 10% calculate the price of the stock 1-yr from now

g=(P1-Po)/Po .10=(P1-45)/45 P1=$49.50

A share of Jones Inc. preferred stock pays a dividend of $1.25 each quarter. You are willing to pay $37.50 for this stock. Your annual return on the investment is:

(4 × 1.25/37.50 = .133 = 13.3%)

TOYS4U stock is selling for $70 today. Similar stocks return 15% you have estimated a captial gains yield of 10%. calculate the next dividend expected on the stock

k=D1/Po+(P1-Po)/Po 15%=dividen yield+10% dividend yield=5%=D1/Po 5%=D1/70 D1=$3.50

Zero-Sum Enterprise expects to pay an annual dividend of $0.48 next year. Dividends and earnings have been growing at a compound annual rate of 8 percent and are expected to continue growing at that rate. What is the return on Zero-Sum if its price is $12?

k = $.48 / $12 + .08 = 12%

You have been offered Synergy Inc.'s preferred stock at a price of $31.50. It pays a dividend of $4.41 per year. Calculate the return on the stock?

k = DP/PP = 4.41/31.50 = 14%

PDQ,Inc. stock is selling for $80 today. you are expecting a dividend of $3 next year and you plan to sell the stock for $95 one year from now. calculate the one-year return on PDQ stock

k= D1/Po+(P1-Po)/Po =(3/80)+((95-80)/80) =3.75%+18.75% =22.5%

The current price of Zebar is $32.00 and its last dividend was $.60. What is its return if dividends are expected to grow indefinitely at 8 percent?

kE = [.60(1.08)/32] + .08 = 10.03%

You are considering purchasing a share of Cass Inc. stock today for $75.00. You forecast no dividend payment this yr but 2 yrs from today , you expect a $10 dividend. you plan to sell the stock immediately after receiving the dividend. if you want to return of15% on the investment,how much must your forecast of the stock price be two yrs from today?

n=2; I/Y=15; PV=75.00; PMT=0; FV=99.19 99.19-10.00=$89.19

ABC Corporation's common stock sells for $52.45 per share. The most actively traded option on ABC's common stock is a call option with a striking price of $50, that is currently priced at $3.12. What is the intrinsic value of the call option?

$52.45 - $50.00 = $2.45

Tammy Smith purchased a call option with a striking price of $40 at a price of $3.50. At expiration, the stock price has risen to $45.00. What is Tammy's return on investment?

($45 - $40 - $3.5) / $3.50 = $1.50 / $3.50 = 0.429

Sharbaugh Inc.'s most recent dividend was $2.0 per share. the dividend is expected to grow at a rate of 4% per year for the foreseeable future. if the market return is 13% on investments with comparable risk, what should the stock sell for today?

(2.00*1.04)/(.13-.04)=$23.11

If a share of preferred stock pays a quarterly dividend of $2.25, has a $60 par value and investors require a return of 15%, the stock will sell for:

(2.25 × 4)/.15 = $60

Berg Inc. has just paid a dividend of $2.00 and is now selling for $48 per share. Similar stocks generally earn a 12.5% return. assuming that Berg Inc. is a constant growth stock,what is its expected rate of growth?

2(1+g)/(.125-g)=48 g=.08=8.0%

Assume a dividend today of $2.50 w/ anticipated growth over the next 3 yrs of 10%. The estimated dividend at the 3rd year is

2.50(1.1)^3=$3.33

a stock just paid an annual dividend of $2.00, which is expected to remain constant indefinitely. The market return is 14%. The estimated selling price of the stock is:

2/.14= $14.29

Pace Enterprises' common stock sells for $29, and its dividends are expected to grow at a rate of 9 percent annually. If investors in Pace require a return of 14%, what is the expected dividend next year?

29=D0(1.09)/(.14-.09) D0=1.33 D1=1.33(1.09) = $1.45

If a share of preferred stock pays a quarterly dividend of $1.50, has a $40 par value, and is currently selling for $50.00, it is earning an annual return of:

6/50=12%

the last dividend paid by Abbot Labs was $1.00. Abbot's growth rate is expected to be a constant 8% for three yrs, after which the growth rate is expected to be 10%. Investors require a return of 16% on stocks like Abbot. What should the price of Abbot's stock be?

D1= 1.08: D2= 1.1664; D3= 1.2597; D4=1.3857 P3=(1.3857)/(.16-.10)=23.0947 Calculator steps for PV: CF1=1.08; CF2= 1.1664; CF3=1.2597+23.0947=24.3544 PV=$17.40

Cantaloupe Growers Corp. is expanding into a new geographic area. Management expects the new market to fuel growth of 22% for three years. After that normal growth of 6% will resume. Cantaloupe's most recent annual dividend was $1.25. Other fruit companies have been returning about 12% lately. How much should a share of Cantaloupe be worth?

D1=1.25(1.22)=1.53 D2=1.86 D3=2.27 D4=2.27(1.06)=2.41 P3=2.41/(.12-.06) = 40.17 P0=1.53(.8929)+1.86(.7972)+2.27(.7118)+40.17(.7118)= $33.06

Long Life Insurance Inc just paid a dividend of $1.50, and projects supernormal growth at of 12% for the next three years. After that growth is expected to slow down to a normal 4% and go on at that rate for the foreseeable future. Similar stocks are earning a return of 10%. How much would you pay for a share of Long Live today?

D1=1.50(1.12)=1.68 D2=1.88 D3=2.11 D4=2.11(1.04)=2.19 P3=2.19/(.10-.04) = 36.50 P0=1.68(.9091)+1.88(.8264)+2.11(.7513)+36.50(.7513)= $32.08

Delta Company has some very exciting prospects in the near future. As a result it is expected to grow at a rate of 20% for the next year. After that it will grow at 7% indefinitely. The interest rate is currently 14% and Delta paid a dividend of $2.60 recently. What should Delta sell for today?

D1=2.60(1.20)=3.12 D2=3.12(1.07)=3.34 P1=3.34/(.14-.07) = 47.71 P0=3.12(.8772)+47.71(.8772) = $44.59

Sudberry Systems Corp. is launching a new product that analysts expect will propel its growth to 18% for about a year. After that everyone expects the firm to return to a more normal 5% growth rate indefinitely. Sudberry recently paid an annual dividend of $3.50. Similar stocks are currently returning 9%. What is the most an investor should be willing to pay for a share of Sudberry?

D1=3.50(1.18)=4.13; D2=4.13(1.05)=4.34 P1=4.34/(.09-.05) = 108.50 P0=4.13(.9174)+108.50(.9174) = $103.33

Rapid City Motors Co. expects to grow at 20% for two years. After that it expects 8% growth indefinitely. The firm recently declared a $4.00 annual dividend. Similar stocks return about 12%. How much should a share of Rapid City be worth today?

D1=4.00(1.20)=4.80 D2=5.76 D3=5.76(1.08)=6.22 P3=6.22/(.12-.08) = 155.50 P0=4.80(.8929)+5.76(.7972)+155.50(.7972) = $132.84

Genestek Inc. just paid a $5.00 dividend. Due to a new product about to be released, analysts expect the company to grow at a supernormal rate of 15% for three years. After that it is expected to grow at a normal rate of 4% indefinitely. Stocks similar to Genestek are currently earning shareholders a return of 12%. The estimated selling price of the stock is:

D1=5.00(1.15)=5.75 D2=6.61 D3=7.60 D4=7.60(1.04)=7.90 P3=7.90/(.12-.04) = 98.75 P0=5.75(.8929)+6.61(.7972)+7.60(.7118)+98.75(.7118)= $86.10

a stock is selling for $20.00(Po). the projected selling price one year from now(P1) is $22.50, and the projected dividend payment one yr from now (D1) is $1.00. What is the expected return on an investment in the stock made today?

Ke=D1/Po+g=1/20+.125= 17.5%

you are considering investing in B&B Inc's stock and your broker has told you that you can purchase it for $72. you require a return 12% for this type of investment. the last dividend (Do) that B&B paid was $4 and a 6% constant growth rate is anticipated. should you purchase B&B inc.?

Po=Do(1+g)/(k-g) Po=4(1.06)/(.06)= $7-.67 $72-$70.67=$1.33 the stock is overpriced

a stock just paid a $2.00 dividend that is anticipated to grow at 6% indefinitely. Similar stocks are returning about 13%. the estimated selling price of this stock is:

Po=Do(1+g)/(k-g)= 2(1.06)/(.13-.06) =$30.29