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FIN 5080 - Jack De Jong:Chapter 7:Stocks, Stock VaIuation, and Stock Market EquiIibriumExampIe 1: What is the value of a preferred stock where the dividend rate is 16% on a \$100 par value?The required rate of return for a stock of this risk level is 12%.Dividend Amount = \$16.00Required Rate of Return = 12.00%VaIue of Preferred Stock = \$133.33ExampIe 2: You own 250 shares of McCormick Resources preferred stock, which currently sells for\$38.50 per share and pays annual dividends of \$3.25 per share.a.What is your expected return?8.44%b.f you require an 8% return, given the current price, should you sell or buy more?\$40.63ExampIe 3: Gilliland Motor, nc. paid a \$3.75 dividend last year.At a constant rate of growth of 6%, what is the value of the common stock if investors require a 20% return?Most recently paid dividend = \$3.7500Required rate of return = 20.00%Growth rate =6.00%Next expected dividend = \$3.9750VaIue of Common Stock = \$28.3929What will be the dividend yield and capital gains yield for the next year?Dividend expected for year 2 = \$4.2135Expected price at end of year 1 = \$30.0964Dividend Yield = Dividend 1/Price 0 = 14.00%Capital Gains Yield = (Price 1 - Price 0)/Price 0 = 6.00%ExampIe 4: The common stock of KPD paid \$1 in dividends last year.Dividends are expected to grow at an 8% annual rate for an indefinite number of years. a.f KPD's current market price is \$25, what is the stock's expected rate of return? b.f your required rate of return is 11%, what is the value of the stock for you? c.Should you make the investment? Most recently paid dividend = \$1.0000Growth rate =8.00%Next expected dividend = \$1.0800Current market price = \$25.00Dividend Yield = D1/P0 = 4.32%Capital Gains Yield = g = 8.00%Expected Return on KPD = 12.32%ExampIe 5: Axel Co. had earnings per share of \$5.00 five years ago.This year their EPS was \$10.00.They expect their growth to continue as before.What will their growth rate be? N 5PV -\$5.00PMT \$0.00FV \$10.00Type 0 I = g 14.87%Problem 7-18: Reizenstein Trucking (RT) has just developed a solar panel capable of generating 200%more electricity than any solar panel currently on the market.As a result, RT is expected to experience a 15% annual growth rate for the next 5 years.By the end of5 years, other firms will have developed comparable technology, and RT's growth ratewill slow to 5% per year indefinitely.Stockholders require a return of 12% on RT's stock.The most recent annual dividend, D0, which was paid yesterday, was \$1.75per share.What's the value of the stock today?Year Growth Rate Dividend Cash FIows0 \$1.75001 15.00% \$2.0125 \$2.01252 15.00% \$2.3144 \$2.3144nn22n1i11iip b w bwb w bwb cccc pspspsrDV StockPreIerred oI Value \$38.50\$3.25 PDr` Return oI Rate Expected0psps .08\$3.25 rDV StockPreIerred oI Valuepspsps g r and rate growth expected g whereg - rg 1 D g - rDP`ss0s10 c gPDr` Return oI Rate Expected01s

3 15.00% \$2.6615 \$2.66154 15.00% \$3.0608 \$3.06085 15.00% \$3.5199 \$56.31806 5.00% \$3.6959Required Rate of Return on RT = 12.00%Price at End of Year 5 = D6/(rs - g) = \$52.7981Find Price Today using NPV: 12.00%NPV \$39.44VoIatiIity ExampIe:Next expected dividend = \$2.00Growth Rate = 5.00%Required rate of return = 10.00%VaIue of Common Stock = \$40.00Required Rate Growth Ratesof Return 4.00% 5.00% 6.00%9.00% \$40.00 \$50.00 \$66.6710.00% \$33.33 \$40.00 \$50.0011.00% \$28.57 \$33.33 \$40.00g - rDP`s10

FIN 5080 - Jack De Jong:Chapter 7:Stocks, Stock VaIuation, and Stock Market EquiIibriumMB8:ProbIem 7-5:CAPM:Year Growth Rate Dividend Cash FIows0 \$2.00001 20.00% \$2.4000 \$2.40002 20.00% \$2.8800 \$61.02343 7.00% \$3.0816Risk-free rate 730Market risk prem. 400Beta 12000RRR on Stock 1230P2 = D3/(rs - g) 381434 \$ P0 hat = NPV 50.5250 \$Year Growth Rate Dividend Cash FIows0 20000 \$ 1 20.00% 24000 \$24000 \$ 2 20.00% 28800 \$28800 \$ 3 7.00% 30816 \$632930 \$ 4 700 32973 \$ Risk-free rate 730Market risk prem. 400Beta 12000RRR on Stock 1230P3 = D4/(rs - g) 622134 \$ P0 = NPV 50.5250 \$ProbIem 7-15:Part a:RRR = 1300D0 = 200 \$Growth Rates P0 Hat300 .50 \$ Part a000 13.33 \$300 21.00 \$1000 44.00 \$1300 #DIV/0! Part b2000 (48.00) \$ Part c: NO, because g > RRR is not sustainabIe.ProbIem 7-12:Year Growth Rate Dividend Cash FIows0 \$1 \$ \$2 \$ \$3 10000 \$10000 \$ 4 3000 13000 \$13000 \$ 5 3000 22300 \$369643 \$ 6 800 24300 \$ RRR = 1300P5 = D6/(rs - g) 3471 \$P0 = NPV 1.8 \$ 2631 \$rong answer if do not include the \$0 g - rDP wherer 1P r 1D r 1D r 1DP`s1 NNNsNNsN2s21s10

### - #P r - r - r r r c c g r and rate growth expected g whereg - rg 1 D g - rDP`ss0s10 c g - rDP wherer 1P r 1D r 1D r 1DP`s1 NNNsNNsN2s21s10

dividends in years 1 and 2.ProbIem 7-11:RRR = 13.00%Year Growth Rate Dividend Cash FIows0 \$1.00001 50.00% \$1.5000 \$1.50002 25.00% \$1.8750 \$30.26793 6.00% \$1.9875P2 = D3/(rs - g) = P0 Hat = NPV 25.0316 \$gPDr` #eturn oI #ate Expected01s

FIN 5080-Jack De Jong:Chapter 7:Stocks, Stock VaIuation, and Stock Market EquiIibriumQuiz #11:May 12, 20111. C Molen nc. has an outstanding issue of perpetual preferred stock with an annual dividend of \$7.50 per share.t is selling in the marketplace for \$117.25 and your required rate of return on this preferred stock is 6.5%.Which of the following statements is true?Annual dividend of preferred = 7.50 \$ Required rate of return on P/S = 6.50%Current market price of P/S = 117.25 \$ ntrinsic Value of P/S =115.38 \$ Expected rate of return on P/S = 6.40%MoIen's P/S is overvaIued, so you wouId seII it if you owned it.2. B Schnusenberg Corporation just paid a dividend of \$0.75 per share, and thatdividend is expected to grow at a constant rate of 6.50% per year in the future.The company's beta is 1.25, the required return on the market is 10.50%, and the riskfree rate is 4.50%.What is the intrinsic value of the company's stock? CAPM:D0 = 0.7500 \$ g = 6.50%D1 = 0.7988 \$ Risk-free rate = 4.50%Market required rate = 10.50%Schnusenberg's beta = 1.25Schnusenberg's RRR = 12.00%Schnusenberg's Intrinsic VaIue = P0 hat = 14.52 \$ pspspsrDV StockPreIerred oI Value0pspsPDr` Return oI Rate Expected i M RF i RF M RF ib RP r b r - r r r c c g r and rate growth expected g whereg - rg 1 D g - rDP`ss0s10 c FIN 5080-Jack De Jong:Chapter 7:Stocks, Stock VaIuation, and Stock Market EquiIibriumQuiz #12:May 17, 20111. E A stock just paid a dividend of \$1.75 per share, has a constant growth rate of 3.6%, and is currently selling for \$32.00 per share.What is the stock's expected total return for the upcoming year?D0 =1.7500 \$g = 3.60%D1 = 1.8130 \$P0 = 32.0000 \$ Dividend Yield = 5.67%Capital Gains Yield = 3.60%Expected rate of return = 9.27%2. A Ackert Company's last dividend was \$1.55.The dividend growth rate isexpected to be constant at 1.5% for the next two years, after which the dividends areexpected to grow at a rate of 8% forever.The firm's required rate of return is 12%.What is the intrinsic value of the company's stock? Year Growth Rate Dividend Cash FIows0 1.5500 \$ 1 1.50% 1.5733 \$1.5733 \$ 2 1.50% 1.5968 \$44.7118 \$ 3 8.00% 1.7246 \$ RRR on Ackert = 12.00%P2 = D3/(rs - g) = 43.1149 \$ Find Price Today = NPV: 12.00%NPV 37.0486 \$ Other Calculations:P3=P2*(1+g) 46.5641 \$ P1=NPV 39.9212 \$ Year 1: Dividend Yield = 4.25%Capital Gains Yield = (P1 - P0)/P0 = 7.75%Total Expected Return in Year 1 = 12.00%gPDr` Return oI Rate Expected01s

g - rDP wherer 1P r 1D r 1D r 1DP`s1 NN NsNNsN2s21s10

FIN 5080 - Jack De Jong:Chapter 9:The Cost of CapitaIExampIe 1: f we were to get our capital through a bank note where the interest rate is 11% and our marginal tax rate is 34%, what would be the cost of our loan?Before-tax Cost of Note =- 11.00%Marginal Tax Rate = 40.00%After-tax Cost of Debt = 6.60%ProbIem 9-9: A company's 6% coupon rate, semiannual payment, \$1,000 par value bond that maturesin 30 years sells at a price of \$515.16.The company's federalplusstate tax rate is 40%.What is the firm's component cost of debt for purposes of calculating the WACC?Find YTM and then adjust for taxes:N 60PV (\$515.16)PMT \$30.00FV \$1,000.00Type 0 = YTM 6.00%6 Month YTM = 6.00%Nominal Annual YTM = 12.00%Marginal Tax Rate = 40.00%After-tax Cost of Debt = 7.20%What if 2% fIotation costs were expected on issuing new bonds?Marginal Tax Rate = 40.00%Flotation Costs as a % = 2.00%N 60PV (\$504.86)PMT \$30.00FV \$1,000.00Type 0 6.12%6 Month Before-tax Cost of Debt = 6.12%Annual Before-tax Cost of Debt = 12.23%After-tax Cost of Debt = 7.34%What happens if the tax rate decreases to 25%?Marginal Tax Rate = 25.00%Flotation Costs as a % = 2.00%After-tax Cost of Debt = 12.23%*(1-.25)= 9.18%ProbIem 9-17(2): T's perpetual preferred stock has a \$100 par value, pays a quarterly dividend of \$2, and has a yield to investors of 11%.New perpetual preferred stock would have to provide the same yield to investors, and the company would incur a 5% flotation cost to sell it.What is the component cost of preferred stock for purposes of calculating the WACC? Quarterly Preferred Dividend = \$2.00Annual Preferred Dividend = \$8.00Yield on Preferred Stock = 11.00%Market Price of Preferred Stock = \$72.73Percentage Flotation Costs = 5.00%Comp. Cost of Preferred Stock = 11.58%ProbIem 9-17(5): Betas, as reported by security analysts, range from 1.3 to 1.7; the Tbond rate is 10%; and the market risk premium is estimated by various brokerage houses to be in the range of 4.5% to 5.5%.What is the component cost of retained earnings? nn22n1i11iip b w bwb w bwb cccc % - 1 r DebtoI Costtax- AIterdc pspspspspspsr`DPPDr` Return oI Rate ExpectedF - 1 PDrpspspsc

i M RF i RF M RF sb RP r b r - r r r c c% - 1 r DebtoI Costtax- AIterdc 2Nd2N1 ttdB2r1M 2r12IN%F - 1 V

c

owest Midpoint HighestRisk-free Rate 10.00% 10.00% 10.00%Market Risk Prem. 4.50% 5.00% 5.50%T's Beta 1.30 1.50 1.70Cost of Equity = 15.85% 17.50% 19.35%ProbIem 9-17(4): The company has 4 million shares of common stock outstanding.The stock's price = \$20, but the stock has recently traded in the range of \$17 to \$23.The most recently paid dividend wa

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