Assignment

Calculate the solutions to the following problems. YOU MUST SHOW YOUR WORK.

1. Low Tech Company has an expected ROE of 10%. The dividend growth rate will be ________ if the firm follows a policy of paying 40% of earnings in the form of dividends.

2. A preferred stock will pay a dividend of $2.75 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow.

You require a return of 10% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

3. You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $1.25 in dividends and $32 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _____ if you wanted to earn a 10% return.

4. Paper Express Company has a balance sheet which lists $85 million in assets, $40 million in liabilities, and $45 million in common shareholders' equity. It has 1,400,000 common shares outstanding. The replacement cost of the assets is $115 million. The market share price is $90.

What is Paper Express's book value per share?

5. Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-­- free rate of return is 4% and the expected return on the market portfolio is 14%. Analysts expect the price of Sure Tool Company shares to be $22 a year from now. The beta of Sure Tool Company's stock is 1.25.

The market's required rate of return on Sure's stock is

What is the intrinsic value of Sure's common shares today?

If Sure's intrinsic value is $21.00 today, what must be its growth rate?

6. High Tech Chip Company paid a dividend last year of $2.50. The expected ROE for next year is 12.5%. An appropriate required return on the stock is 11%. If the firm has a plowback ratio of 60%, the dividend in the coming year should be

7. An analyst has determined that the intrinsic value of HPQ stock is $20 per share using the capitalized earnings model. If the typical P/E ratio in the computer industry is 25, then it would be reasonable to assume the expected EPS of HPQ in the coming year is

8. Old Quartz Gold Mining Company is expected to pay a dividend of $8 in the coming year. Dividends are expected to decline at the rate of 2% per year. The risk-­-free rate of return is 6% and the expected return on the market portfolio is 14%. The stock of Old Quartz Gold Mining Company has a beta of -­-0.25. The intrinsic value of the stock is

9. Low Tech Chip Company is expected to have EPS of $2.50 in the coming year. The expected ROE is 14%. An appropriate required return on the stock is 11%. If the firm has a dividend payout ratio of 40%, the intrinsic value of the stock should be

10. Risk Metrics Company is expected to pay a dividend of $3.50 in the coming year. Dividends are expected to grow at a rate of 10% per year. The risk-­-free rate of return is 5% and the expected return on the market portfolio is 13%. The stock is trading in the market today at a price of $90.00.

What is the expected rate of return on equity for Risk Metrics?

What is the approximate beta of Risk Metrics' stock?

11. EMC Company is expected to pay a dividend in year 1 of $1.65, a dividend in year 2 of $1.97, and a dividend in year 3 of $2.54. After year 3, dividends are expected to grow at the rate of 8% per year. An appropriate required return for the stock is 11%. The stock should be worth _______ today.

12. The growth in dividends of Calpine, Inc. is expected to be 8% per year for the next two years, followed by a growth rate of 4% per year for three years; after this five-­-year period, the growth in dividends is expected to be 3% per year, indefinitely. The required rate of return on Calpine, Inc. is 11%. Last year's dividends per share were $2.75. What should the stock sell for today?

13. Stingy Corporation is expected have EBIT of $1.2M this year. Stingy Corporation is in the 30% tax bracket, will report $133,000 in depreciation, will make $76,000 in capital expenditures, and will have a $24,000 increase in net working capital this year. What is Stingy's FCFF?

USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS

A large grocery chain is reevaluating its bonds since it is planning to issue a new bond in the current market. The firm's outstanding bond issue has 6 years remaining until maturity.

The bonds were issued with a 6 percent coupon rate (paid semiannually) and a par value of $1,000. Because of increased risk the required rate has risen to 10 percent.

14. What is the current value of these securities?

15. What will be the value of these securities in one year if the required return declines to 8 percent?

16. In 2008, Talbot Inc. issued a $110 par value preferred stock that pays a 9 percent annual dividend. Due to changes in the overall economy and in the company's financial condition investors are now requiring a 16 percent return. What price would you be willing to pay for a share of the preferred if you receive your first dividend one year from now?

USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS

Five years ago your firm issued $1,000 par, 20-­-year bonds with a 6% coupon rate and an 8% call premium. The price of these bonds now is $1103.80. Assume annual compounding.

17. Calculate the yield to maturity of these bonds today.

18. If these bonds are now called, what is the actual yield to call for the investors who originally purchased them?

USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS

You purchase an 8% coupon, 25-­-year, $1,000 par, semiannual payment bond priced at $980 when it has 15 years remaining until maturity.

19. What is its yield to maturity?

20. What is the yield to call if the bond is called 5 years from today with a 5% premium?