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FIN 500

8-1A.   (Preferred
Stock Valuation)
What is the value of a preferred stock where the dividend
rate is 16 percent on a $100 par value? The appropriate discount rate for a
stock of this risk level is 12 percent.

8-2A.   (Preferred
Stockholder Expected Return)
Shewmaker’s preferred stock is selling for
$55.16 and pays $2.35 in dividends. What is your expected rate of return if you
purchase the security at the market price?

8-3A.   (Preferred
Stockholder Expected Return)
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?

b.         If you require an 8 percent return,
given the current price, should you sell or buy more stock?

8-4A.   (Common
Stock Valuation)
You intend to purchase Bama, Inc., common stock at $52.75
per share, hold it one year, and sell after a dividend of $6.50 is paid. How
much will the stock price have to appreciate if your required rate of return is
16 percent?

8-5A.   (Common
Stockholder Expected Return)
Blackburn & Smith’s common stock currently
sells for $23 per share. The company’s executives anticipate a constant growth
rate of 10.5 percent and an end-of-year dividend of $2.50.

a.         What is the expected rate of return if
you buy the stock for $23?

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

8-6A.   (Common
Stock Valuation)
Gilliland Motor, Inc., paid a $3.75 dividend last year. At
a constant growth rate of 6 percent, what is the value of the common stock if
the investors require a 20 percent rate of return?

8-7A.   (Measuring
Growth)
Given that a firm’s return on equity is 24 percent and management
plans to retain 60 percent of earnings for investment purposes, what will be
the firm’s growth rate?

8-8A.   (Common
Stockholder Expected Return)
The common stock of Bouncy-Bob Moore Co. is
selling for $33.84. The stock recently paid dividends of $3 per share and has a
projected constant growth rate of 8.5 percent. If you purchase the stock at the
market price, what is your expected rate of return?

8-9A.   (Common
Stock Valuation)
Honeybee common stock is expected to pay $1.85 in
dividends next year, and the market price is projected to be $40 by year end.
If the investor’s required rate of return is 12 percent, what is the current
value of the stock?

8-10A. (Common
Stock Expected Rate of Return)
The market price for M. Simpson & Co.’s
common stock is $44. The price at the end of one year is expected to be $47,
and dividends for next year should be $2. What is the expected rate of return?

8-11A. (Preferred
Stock Valuation)
Gree’s preferred stock is selling for $35 in the market
and pays a $4 annual dividend.

a.         What is the expected rate of return of
the stock?

b.         If an investor’s required rate of
return is 10 percent, what is the value of the stock for the investor?

c.         Should the investor acquire the stock?

8-12A. (Common
Stock Valuation)
The common stock of KPD paid $1 in dividends last year.
Dividends are expected to grow at an 8 percent annual rate for an indefinite
number of years.

a.         If KPD’s current market price is $25,
what is the stock’s expected rate of return?

b.         If your required rate of return is 11
percent, what is the value of the stock for you?

c.         Should you make the investment?

8-13A. (Comprehensive
Problem in Valuing Securities)
You are considering three investments. The
first is a bond that is selling in the market at $1,200. The bond has a $1,000
par value, pays interest at 14 percent, and is scheduled to mature in 12 years.
For the bonds of this risk class you believe that a 12 percent rate of return
should be required. The second investment that you are analyzing is a preferred
stock ($100 par value) that sells for $80 and pays an annual dividend of $12.
Your required rate of return for this stock is 14 percent. The last investment
is a common stock ($35 par value) that recently paid a $3 dividend. The firm’s
earnings per share have increased from $4 to $8 in 10 years, which also
reflects the expected growth in dividends per share for the indefinite future.
The stock is selling for $25, and you think a reasonable required rate of
return for the stock is 20 percent.

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

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

c.         1.         If
your required rates of return changed to 14 percent for the bond, 16 percent
for the preferred stock, and 18 percent for the common stock, how would your
answers change to parts (a) and (b)?

            2.         Assuming
again that your required rate of return for the common stock is 20 percent, but
the anticipated constant growth rate changes to 12 percent, would your answers
to parts (a) and (b) be different?

 

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