Chapter 9 - EOC Solutions

Chapter 9 - EOC Solutions - Answers to End-of-Chapter...

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Unformatted text preview: Answers to End-of-Chapter Questions 9-1 a. The average investor of a firm traded on the NYSE is not really interested in maintaining his or her proportionate share of ownership and control. If the investor wanted to increase his or her ownership, the investor could simply buy more stock on the open market. Consequently, most investors are not concerned with whether new shares are sold directly (at about market prices) or through rights offerings. However, if a rights offering is being used to effect a stock split, or if it is being used to reduce the underwriting cost of an issue (by substantial underpricing), the preemptive right may well be beneficial to the firm and to its stockholders. b. The preemptive right is clearly important to the stockholders of closely held (private) firms whose owners are interested in maintaining their relative control positions. 9-2 No. The correct equation has D 1 in the numerator and a minus sign in the denominator. 9-3 Yes. If a company decides to increase its payout ratio, then the dividend yield component will rise, but the expected long-term capital gains yield will decline. 9-4 Yes. The value of a share of stock is the PV of its expected future dividends. If the two investors expect the same future dividend stream, and they agree on the stocks riskiness, then they should reach similar conclusions as to the stocks value. 9-5 A perpetual bond is similar to a no-growth stock and to a share of perpetual preferred stock in the following ways: 1. All three derive their values from a series of cash inflowscoupon payments from the perpetual bond, and dividends from both types of stock. 2. All three are assumed to have indefinite lives with no maturity value (M) for the perpetual bond and no capital gains yield for the stocks. However, there are preferreds that have a stated maturity. In this situation, the preferred would be valued much like a bond with a stated maturity. Both derive their values from a series of cash inflowscoupon payments and a maturity value for the bond and dividends and a stock price for the preferred. Chapter 9: Stocks and Their Valuation Answers and Solutions 1 Solutions to End-of-Chapter Problems 9-1 D = $1.50; g 1-3 = 7%; g n = 5%; D 1 through D 5 = ? D 1 = D (1 + g 1 ) = $1.50(1.07) = $1.6050....
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This note was uploaded on 02/11/2011 for the course FIN 3403 taught by Professor Tapley during the Spring '06 term at University of Florida.

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Chapter 9 - EOC Solutions - Answers to End-of-Chapter...

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