BusFin Ch 7

Dealer

an agent who buys and sells securities from inventory

Lengefeld Manufacturing expects to have earnings per share of $1.80 in the coming year. Rather than reinvest these earnings and grow, the firm plans to pay out all of its earnings as a dividend. With these expectations of no growth, Lengefeld's current share price is $24. Suppose Lengefeld could cut its dividend payout rate to 50% for the foreseeable future and use the retained earnings to open an additional factory. The return on investment in the new factory is expected to be 15%. If we assume that the risk of the new factory is the same as the risk of its existing factories, then the firm's equity cost of capital is unchanged. What effect would this new policy have on Lengefeld's stock price?

120.48

Small Fry, Inc., has just invented a potato chip that looks and tastes like a french fry. Given the phenomenal market response to this product, Small Fry is reinvesting all of its earnings to expand its operations. Earnings were $5 per share this past year and are expected to grow at a rate of 30% per year until the end of year 3. At that point, other companies are likely to bring out competing products. Analysts project that at the end of year 3, Small Fry will cut its investment and begin paying 75% of its earnings as dividends. Its growth will also slow to a long-run rate of 5%. If Small Fry's equity cost of capital is 9%, what is the value of a share today?

173.39

Suppose The Walt Disney Company plans to pay $0.38 per share in dividends in the coming year. If its equity cost of capital is 10.6% and dividends are expected to grow by 9.5% per year in the future, estimate the value of Disney's stock.

34.55

Suppose Lengefeld Manufacturing decides to cut its dividend payout rate to 50% to invest in new stores, as in Example 7.3b. But now suppose that the return on these new investments is 8%, rather than 15%. Give its expected earnings per share this year of $2 and its equity cost of capital of 8.33% (we again assume that the risk of the new investments is the same as its existing investments), what will happen to Lengefeld's current share price in this case?

23.09

Pittsburgh & West Virginia Railroad (PW) expects to have earnings per share of $0.48 in the coming year. Rather than reinvest these earnings and grow, the firm plans to pay out all of its earnings as a dividend. With these expectations of no growth, PW's current share price is $10. Suppose PW could cut its dividend payout rate to 67% for the foreseeable future and use the retained earnings to expand. The return on investment in the expansion is expected to be 11%. If we assume that the risk of these new investments is the same as the risk of its existing investments, then the firm's equity cost of capital is unchanged. What effect would this new policy have on PW's stock price?

27.35

Suppose Target Corporation plans to pay $0.68 per share in dividends in the coming year. If its equity cost of capital is 10% and dividends are expected to grow by 8.4% per year in the future, estimate the value of Target's stock.

42.50

Suppose you expect Longs Drug Stores to pay an annual dividend of $0.56 per share in the coming year and to trade $45.50 per share at the end of the year. If investments with equivalent risk to Longs' stock have an expected return of 6.80%, what is the most you would pay today for Longs' stock? What dividend yield and capital gain rate would you expect at this price?

43.13

Consolidated Edison, Inc. (Con Edison), is a regulated utility company that services the New York City area. Suppose Con Edison plans to pay $2.30 per share in dividends in the coming year. If its equity cost of capital is 7% and dividends are expected to grow by 2% per year in the future, estimate the value of Con Edison's stock.

46.00

Small Fry, Inc., has just invented a potato chip that looks and tastes like a french fry. Given the phenomenal market response to this product, Small Fry is reinvesting all of its earnings to expand its operations. Earnings were $2 per share this past year and are expected to grow at a rate of 20% per year until the end of year 4. At that point, other companies are likely to bring out competing products. Analysts project that at the end of year 4, Small Fry will cut its investment and begin paying 60% of its earnings as dividends. Its growth will also slow to a long-run rate of 4%. If Small Fry's equity cost of capital is 8%, what is the value of a share today?

49.42

Suppose Crane Supporting Goods decides to cut its dividend payout rate to 75% to invest in new stores, as in Example 7.3. But now suppose that the return on these new investments is 8%, rather than 12%. Give its expected earnings per share this year of $6 and its equity cost of capital of 10% (we again assume that the risk of the new investments is the same as its existing investments), what will happen to Crane's current share price in this case?

56.25

Suppose you expect Harford Industries to pay an annual dividend of $5.35 per share in the coming year and to trade $63.32 per share at the end of the year. If investments with equivalent risk to Harford's stock have an expected return of 12.5%, what is the most you would pay today for Harford's stock? What dividend yield and capital gain rate would you expect at this price?

61.04

Crane Sporting Goods expects to have earnings per share of $6 in the coming year. Rather than reinvest these earnings and grow, the firm plans to pay out all of its earnings as a dividend. With these expectations of no growth, Crane's current share price is $60. Suppose Crane could cut its dividend payout rate to 75% for the foreseeable future and use the retained earnings to open new stores. The return on investment in these stores is expected to be 12%. If we assume that the risk of these new investments is the same as the risk of its existing investments, then the firm's equity cost of capital is unchanged. What effect would this new policy have on Crane's stock price?

64.29

3M Co. has 698 million shares outstanding and expects earnings at the end of this year of $2.96 billion. 3M plans to pay out 50% of its earnings in total, paying 25% as a dividend and using 25% to repurchase shares. If 3M's earnings are expected to grow by 9.2% per year and these payout rates remain constant, determine 3M's share price assuming an equity cost of capital of 12%.

75.73

Suppose you expect Koch Industries to pay an annual dividend of $2.31 per share in the coming year and to trade $82.75 per share at the end of the year. If investments with equivalent risk to Koch's stock have an expected return of 8.9%, what is the most you would pay today for Koch's stock? What dividend yield and capital gain rate would you expect at this price?

78.11

Titan Industries has 217 million shares outstanding and expects earnings at the end of this year of $860 million. Titan plans to pay out 50% of its earnings in total, paying 30% as a dividend and using 20% to repurchase shares. If Titan's earnings are expected to grow by 7.5% per year and these payout rates remain constant, determine Titan's share price assuming an equity cost of capital of 10%.

79.26

Suppose Pittsburgh & West Virginia Railroad decides to cut its dividend payout rate to 67% to invest in new stores, as in Example 7.3a. But now suppose that the return on these new investments is 4%, rather than 11%. Give its expected earnings per share this year of $0.48 and its equity cost of capital of 4.8% (we again assume that the risk of the new investments is the same as its existing investments), what will happen to PW's current share price in this case?

9.20

The firm can increase its dividend in three ways

It can increase its earnings It can increase its dividend payout rate It can decrease its number of shares outstanding

Common Stock

Term used to describe the total amount paid in by stockholders for the shares they purchase.

Round Lot

The number of shares being traded is at least 100.

Floor Broker

a person at the NYSE with a trading license who represents orders on the floor, balancing speed and price to get the best execution

Straight Voting

a procedure in which a shareholder may cast all votes for each member of the board of directors

Cumulative Voting

a procedure in which a shareholder may cast all votes for one member of the board of directors

Limit Order

a request to buy or sell a stock at a specified price

Market Order

a request to buy or sell a stock at the current market value

Super Display Book System

the new server-based electronic trading system at the NYSE