University College of the Cayman Islands

FIN301 Financial Management

Tutorial #7 - Stock Valuation - Chapter 8

 

  1. Differentiate between an asset’s market value, intrinsic value and book value.  

  2. What is the value of a preferred stock where the dividend rate is 14% on a $100 par value? The appropriate discount rate for a stock of this risk is 12%.

  3. A preferred stock is selling for $42.16 and pays $1.95 in dividends. What is your expected rate of return if you purchase the security at the market price?

  4. 8-1

  5. Pioneer’s preferred stock is selling for $33 in the market and pays a $3.60 annual dividend.

                (i)    What is the expected rate of return on the stock?

    (ii)             If an investor’s required rate of return is 10%, what is the intrinsic value of the stock for that investor?  

     

  6. You own 200 of Summer Ltd.'s non-redeemable preferred stock, which currently sells at $40 and pays annual dividend of $3.40.

     (i)          What is the stock’s expected rate of return?

    (ii)         If you require an 8% return and given the current price, should you sell or buy more stocks?  

     

  7. A firm's common stock paid a $3.50 dividend last year. At a growth rate of 5%, what is the value of the common stock if the investors require a 20% rate of return?

  8. 8-2

  9. 8-3

  10. Off Inc. common stock currently sells for $22.50 per share. The company’s executives anticipate a growth rate of 10% and end-of-year dividend of $2.

        a. What is your expected rate of return?

        b. If you require a 17% return, should you purchase the stock?

  1. 8-12

  2. You are considering the purchase of 100 shares of Slick Inc.’s common stock. The beta on the security is 1.65, and the current market premium is 5.6%

        a.  What is the required rate of return if the risk-less rate of interest is 12%?

        b.  Given the rate of return computed in (a), an expected dividend of $8.50 and a 5% growth rate, what value do you place on the stock?

  1. You intend to purchase a common stock at $50 per share, hold it for one year, and sell after a dividend of $6 is paid. How much will the stock price have to appreciate if your required rate of return is 15%?  

  1. You are considering two investments. The first is a preferred stock ($100 par value) that sells for $90 and pays an annual dividend of $13. Your required rate of return for this stock is 15%.

The second investment is a common stock ($25 par value) that recently paid a $2 dividend. The firm’s earnings per share have increased from $3 to $6 in 10 years, which also reflects the expected growth in dividends per share for the indefinite future. The stock is selling for $20, and you think a reasonable required rate of return for the stock is 20%.

 a.  Calculate the value of each security based on your required rate of return.

b.  Which of the investment(s) should you accept? Why?

c.   If your required rates of return changed to14% for the preferred stock and 18% for the common stock, how would your answer change for parts (a) and (b)?

 

  1. Over the next three years, a corporation is expected to pay dividends of $6, $7 and $7.50 per share of common stock. Thereafter dividend per share is expected to grow at an annual rate of 8.5%. If investors require an annual rate of return of 12.5%, find the value of this stock.  

  2. 8-5   

  3. DOMS Ltd. needs more financing and will be issuing common stock. DOMS will be paying a dividend of $2.55 at the end of the year. Dividends are expected to decline at 25% per year for the following two years, after which they are expected to grow at a rate of 10% per year to infinity. What is the value of this security if an investor has a required return of 15%?

  4. 8-14

  5. 8-20

  6. 8-10

  7. 8-7

  8. 8-9