HW4_-_Part_2_-_Financial_Mathematics (1)

# HW4_-_Part_2_-_Financial_Mathematics (1) - SI Universidad...

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SI Universidad Iberoamericana UNIBE Financial Mathematics Professor Osvaldo Lagares Homework 4 Part 2 Milton De Aza (10- Valerie Bodden (10-0014) Nicole Perez (10- March 15, 2011 Santo Domingo, Dominican Republic Page 1 of 10

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SILABO – GERENCIA EMPRESARIAL Universidad Iberoamericana UNIBE Due Date : March 17, 2011 Deliver hard copy at the beginning of class and send the electronic file through email. Note: Use as exercises the study problems of chapter 6 that are in the photocopies of the book Foundations of Finance that is available at the photocopy office located in the basement of the FRA1 building at UNIBE. In all the problems set the student must provide a clear mathematical argument for the response. Otherwise a partial credit will be given for correct answers. Lecture 11: The Valuation and Characteristics of Stocks (10 Exercises) Exercises: 8-2, 8-5, 8-6, 8-7, 8-10, 8-15, 8-16, 8-18, 8-22, 8-23 8-2 ) The Fisayo Corporation wants to achieve a steady 7 percent growth rate. If it can achieve a 12 percent return on equity. W hat percentage of earnings must Fisayo retain for investment purposes? g= ROE x pr 7% = 12% x pr pr = 7%/12% = .58 Page 2 of 10 FINANCIAL MATHEMATICS HOMEWORK 4: PART 2
8-5) What is the value of preferred stock when the dividend rate is 14% on a \$100 par value? The appropriate discount rate for a stock of this risk level is 12 percent. Value = dividend/ required rate V= 0.14 * \$100 / 0.12 = 14/0.12 = \$116.67 8-6 ) Solitron preferred stock is selling for \$42.16 per share and pays 1.95 dividends. What is your expected rate of return if you purchase the security at the market price? Vps = D/ rp \$42.16= 1.95/ rp Rp = 1.95/42.16 .0462 4.62% 8-7) You own 200 shares of Somner Resources preferred stock, which currently sells for \$ 40 per share and pays annual dividends of 3.49 per share. a) What is your expected return? Rp= vps/D \$3.49/\$40= 8.72% b) If you require an 8 percent return, given the current price, should you sell or buy more stock? Buy stock because they are paying over the require rate of return. 8-10) Header Motor Inc. paid a \$3.50 dividend last year. At a constant growth rate of 5 percent, what is the value of the common stock if the investors require a 20 percent rate of return? D= \$3.50 + 5% = 3.675 Vps = D/ rp vps = \$3.675/ 0.20 -0.05= \$24.5 8-15) Pioneer preferred stocks are selling for \$33 per share in the market and pays a 3.60 annual dividend. a) What is the expected rate of return on the stock? Rp= D/ vps Rp = \$3.60 / \$33 = 10.91% b) If an investor’s required rate of return is 10 percent, what is the value of the stock for that investor? Vps = \$3.60/.10= \$36 c) Should the investor acquire the stock? Yes, the preferred stock value is greater than that of the market price. 8-16)

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