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

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ned companies. The company receives no new money when sales are made in the secondary market. The primary market handles additional shares sold by established, publicly owned companies. Companies can raise additional capital by selling in this market. Going public is the act of selling stock to the public at large by a closely held corporation or its principal stockholders, and this market is often termed the initial public offering (IPO) market. Ö d. Intrinsic value ( P0 ) is the present value of the expected future cash flows. The market price (P0) is the price at which an asset can be sold. Answers and Solutions: 7 - 1 e. The required rate of return on common stock, denoted by rs, is the minimum acceptable rate of return considering both its riskiness and the returns available on  other investments. The expected rate of return, denoted by rs , is the rate of return expected on a stock given its current price and expected future cash flows. If the stock is in equilibrium, the required rate of return will equal the expected rate of return. The realized (actual) rate of return, denoted by r s , is the rate of return that was actually realized at the end of some holding period. Although expected and required rates of return must always be positive, realized rates of return over some periods may be negative. f. The capital gains yield results from changing prices and is calculated as (P1 - P0)/P0, where P0 is the beginning-of-period price and P1 is the end-of-period price. For a constant growth stock, the capital gains yield is g, the constant growth rate. The dividend yield on a stock can be defined as either the end-of-period dividend divided by the beginning-of-period price, or the ratio of the current dividend to the current price. Valuation formulas use the former definition. The expected total return, or expected rate of return, is the expected capital gains yield plus the expected dividend yield on a stock. The expected total return on a bond is the yield to maturity. g. Normal, or constant, growth occurs when a firm¶s earnings and dividends grow at some const...
View Full Document

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern