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a.What is the market value of the outstanding preferred stock?b.If an investor purchases the preferred stock at the value calculated in part a,how much does she gain or lose per share if she sells the stock when therequired return on similar-risk preferreds has risen to 10.5%? Explain.7–9Common stock value—Constant growthUse the constant-growth model(Gordon model) to find the value of each firm shown in the following table.7–10Common stock value—Constant growthMcCracken Roofing, Inc., commonstock paid a dividend of $1.20 per share last year. The company expects earn-ings and dividends to grow at a rate of 5% per year for the foreseeable future.a.What required rate of return for this stock would result in a price per shareof $28?b.If McCracken had both earnings growth and dividend growth at a rate of10%, what required rate of return would result in a price per share of $28?7–11Common stock value—Constant growthElk County Telephone has paid thedividends shown in the following table over the past 6 years.YearDividend per share2003$2.8720022.7620012.6020002.4619992.3719982.25FirmDividend expected next yearDividend growth rateRequired returnA$1.208%13%B4.00515C0.651014D6.0089E2.25820
344PART 2Important Financial ConceptsLG4LG4LG4LG4The firm’s dividend per share next year is expected to be $3.02.a.If you can earn 13% on similar-risk investments, what is the most you wouldbe willing to pay per share?b.If you can earn only 10% on similar-risk investments, what is the most youwould be willing to pay per share?c.Compare and contrast your findings in parts aand b,and discuss the impactof changing risk on share value.7–12Common stock value—Variable growthNewman Manufacturing is consider-ing a cash purchase of the stock of Grips Tool. During the year just completed,Grips earned $4.25 per share and paid cash dividends of $2.55 per share (D0$2.55). Grips’ earnings and dividends are expected to grow at 25% per year forthe next 3 years, after which they are expected to grow at 10% per year to infin-ity. What is the maximum price per share that Newman should pay for Grips ifit has a required return of 15% on investments with risk characteristics similarto those of Grips?7–13Common stock value—Variable growthHome Place Hotels, Inc., is enteringinto a 3-year remodeling and expansion project. The construction will have alimiting effect on earnings during that time, but when it is complete, it shouldallow the company to enjoy much improved growth in earnings and dividends.Last year, the company paid a dividend of $3.40. It expects zero growth in thenext year. In years 2 and 3, 5% growth is expected, and in year 4, 15% growth.In year 5 and thereafter, growth should be a constant 10% per year. What is themaximum price per share that an investor who requires a return of 14% shouldpay for Home Place Hotels common stock?