TUTORIAL CHAPTER 11
STOCK MARKET
Theoretical questions:
1. What distinguishes stocks from bonds?
2. Compare the problem of estimating stock cash flow to estimating bond cash flow. Which security
would you predict to be more volatile?
Problems:
1. Calculate the value of a preffered stock that pays a dividend of $6 per share and your required rate
of return is 12 percent.
Solution:
V = $6/0.12 = $ 50
2. The shares of Misheak, Inc. are expected to generated the following possible returns over the next
12 months:
Return
Probability
5%
0.10
5%
0.25
10%
0.30
15%
0.25
25%
0.10
If the stock is currently trading at $25/share, what is the expected price in one year. Assume
that the stock pays no dividends.
Solution:The expected return over the next 12 months is calculated as:
 0.05
×
0.10 0.05
×
0.25 0.10
×
0.30 0.15
×
0.25 0.25
×
0.10 = 0.10
This suggests that the expected price is $25
*
(1.11) = $27.50
3.Huskie Motor’s just paid an annual dividend of $1.00 per share. Management has promised
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview.
Sign up
to
access the rest of the document.
 Three '11
 Sanghoonlee
 valueweighted arithmetic mean

Click to edit the document details