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Unformatted text preview: onversion ratio and the price of the common
shares, what is the current conversion value of each preferred share?
b. If the preferred shares are selling at $96.00 each, should an investor convert
the preferred shares to common shares?
c. What factors might cause an investor not to convert from preferred to
common? LG2 7–5 Stock quotation Assume that the following quote for the Advanced Business
Machines stock (traded on the NYSE) was found in the Thursday, December 14,
issue of the Wall Street Journal.
3.2 84.13 51.25 AdvBusMach ABM 1.32 1.6 23 12432 81.75 1.63 Given this information, answer the following questions:
a. On what day did the trading activity occur?
b. At what price did the stock sell at the end of the day on Wednesday,
c. What percentage change has occurred in the stock’s last price since the beginning of the calendar year?
d. What is the firm’s price/earnings ratio? What does it indicate?
e. What is the last price at which the stock traded on the day quoted?
f. How large a dividend is expected in the current year?
g. What are the highest and the lowest price at which the stock traded during
the latest 52-week period?
h. How many shares of stock were traded on the day quoted?
i. How much, if any, of a change in stock price took place between the day
quoted and the day before? At what price did the stock close on the day before?
LG4 7–6 Common stock valuation—Zero growth Scotto Manufacturing is a mature
firm in the machine tool component industry. The firm’s most recent common
stock dividend was $2.40 per share. Because of its maturity as well as its stable
sales and earnings, the firm’s management feels that dividends will remain at the
current level for the foreseeable future.
a. If the required return is 12%, what will be the value of Scotto’s common
b. If the firm’s risk as perceived by market participants suddenly increases,
causing the required return to rise to 20%, what will be the common stock
value? CHAPTER 7 Stock Valuation 343 c. Judging on the basis of your findings in parts a and b, what impact does risk
have on value? Explain.
LG4 7–7 Common stock value—Zero growth Kelsey Drums, Inc., is a well-established
supplier of fine percussion instruments to orchestras all over the United States.
The company’s class A common stock has paid a dividend of $5.00 per share per
year for the last 15 years. Management expects to continue to pay at that rate
for the foreseeable future. Sally Talbot purchased 100 shares of Kelsey class A
common 10 years ago at a time when the required rate of return for the stock
was 16%. She wants to sell her shares today. The current required rate of return
for the stock is 12%. How much capital gain or loss will she have on her shares? LG4 7–8 Preferred stock valuation Jones Design wishes to estimate the value of its outstanding preferred stock. The preferred issue has an $80 par value and pays an
annual dividend of $6.40 per share. Similar-risk preferred...
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