SOALAN.docx - CHAPTER 10 PROBLEM 8 PREFERED STOCK VALUATION Ezzel corporation issued perpetual preferred stock with a 10 annual dividend The stock

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CHAPTER 10 PROBLEM 8 PREFERED STOCK VALUATION Ezzel corporation issued perpetual preferred stock with a 10% annual dividend. The stock currently yields 8%, and its par value is \$100. a) What is the stock value? b) Suppose interest rates rise and pull the preferred stock’s yield up to 12%. What is its new market value? PROBLEM 11 VALUATION OF A CONSTANT GROWTH STOCK A stock is expected to pay a dividend of \$0.50 at the end of the year (ie: D 1 = 0.50), and it should continue to grow at a constant rate of 7% per year. If its required return 12%, what is the stock’s expected price 4 years from today? PROBLEM 13 CONSTANT GROWTH Quanta Inc. has beta of 1.5. the market risk premium is 7% and the risk-free rate is 3%. Assuming that the market is in equilibrium and the stock currently sells for a \$30 a share, Quanta just paid \$2 dividend this year and the dividend is expected to grow at a constant rate g. what does the market believe will be the stock price at the end of 2 years? PROBLEM 14 NONCONSTANT GROWTH Microtech Corporation is expanding rapidly and currently needs to retain all of its earnings ; hence, it does not pay dividends. However, investors expect Microtech to begin paying dividends, beginning with a dividend of \$1.00 coming 3 years from today. The dividend should grow rapidly – at a rate of 50% per year – during Years 4 and 5; but after Year 5, growth should be a constant 8% per year. If the required return on Microtech is 15%, what is the value of the stock today?

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