59533341-FM11-Ch-07-Instructors-Manual-1

5 155 p0 d1rs g 2250155 005 2143 b

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Unformatted text preview: .5%. Ö P0 = D1/(rs - g) = $2.25/(0.155 - 0.05) = $21.43. Ö b. rs = 9% + (12% - 9%)1.5 = 13.5%. P0 = $2.25/(0.135 - 0.05) = $26.47. Ö c. rs = 9% + (11% - 9%)1.5 = 12.0%. P0 = $2.25/(0.12 - 0.05) = $32.14. d. New data given: rRF = 9%; rM = 11%; g = 6%, b = 1.3. rs = rRF + (rM - rRF)b = 9% + (11% - 9%)1.3 = 11.6%. Ö P0 = D1/(rs - g) = $2.27/(0.116 - 0.06) = $40.54. Answers and Solutions: 7 - 14 SOLUTION TO SPREADSHEET PROBLEM 7-20 The detailed solution for the problem is available both on the instructor¶s resource CDROM (in the file Solution for FM11 Ch 07 P20 Build a Model.xls) and on the instructor¶s side of the web site, http://brigham.swlearning.com. Answers and Solutions: 7 - 15 MINI CASE Sam Strother and Shawna Tibbs are senior vice presidents of the Mutual of Seattle. They are co-directors of the company¶s pension fund management division, with Strother having responsibility for fixed income securities (primarily bonds) and Tibbs being responsible for equity investments. A major new client, the Northwestern Municipal League, has requested that Mutual of Seattle present an investment seminar to the mayors of the represented cities, and Strother and Tibbs, who will make the actual presentation, have asked you to help them. To illustrate the common stock valuation process, Strother and Tibbs have asked you to analyze the Temp Force Company, an employment agency that supplies word processor operators and computer programmers to businesses with temporarily heavy workloads. You are to answer the following questions. a. Describe briefly the legal rights and privileges of common stockholders. Answer: The common stockholders are the owners o f a corporation, and as such, they have certain rights and privileges as described below. 1. Ownership implies control. Thus, a firm¶s common stockholders have the right to elect its firm¶s directors, who in turn elect the officers who manage the business. 2. Common stockholders often have the right, called the preemptive right, to purchase any additional shares sold by the fir...
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