John and Jane Doe are senior vice presidents of Insurance Mutual of Tampa. They co-manage the equity investments for the company's pension fund division. They have been asked by a new client to present an investment seminar and need your assistance. As part of the preparation for the seminar, you will need to analyze the new client, the XYZ Company.

Procedure

1. Write a brief overview concerning stock valuation. Your overview should include:

a. A brief explanation of the legal rights and privileges of common stockholders.

b. Identification of a formula that applies to the valuation of all stocks.

c. An explanation of what constitutes a "constant growth stock" and how it is valued.

2. Complete the following stock value calculations:

a. Assume that XYZ is a constant growth company whose last dividend was $2.00 with the dividend expected to grow at 6% indefinitely. Calculate the following:

1. The expected dividends for the next three years

2. The current stock price

3. The expected value in one year

4. The dividend yield, capital gains yield, and total return during the first year

b. Now assume that XYZ is expected to grow 30% for the next three years and then grow indefinitely at 6%. Calculate the following:

1. The current stock price

2. The dividend yield and capital gains yield in the first year

c. Now assume that XYZ is a constant negative growth company whose last dividend was $2.00 with the dividend expected to grow at -6% indefinitely. Calculate the stock price.

3. Wrap up your analysis by explaining why investors would be willing to purchase the stock