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Title: Preferred stock (solve for value)

1. Timeless Corporation issued preferred stock with a par value of $700. The stock

promised to pay an annual dividend equal to 19.0% of the par value. If the

appropriate discount rate for this stock is 10.0%, what is the value of the stock?

a. $1,330.00

b. $368.42

c. $772.28

d. $1,532.16

e. $1,506.89

Title: Preferred stock (solve for req. return)

2. Forever, Inc.'s preferred stock has a par value of $1,000 and a dividend equal to

13.0% of the par value. The

stock is currently selling for $907.00. What discount rate is being used to value the

stock?

a. 15.08%

b. 14.33%

c. 15.75%

d. 13.34%

e. 12.10%

Title: Preferred stock (solve for dividend)

3. Here and After Corporation plans a new issue of preferred stock. Similar risk

stock currently offers an

annual return to investors of 17.0%. The company wants the stock to sell for

$569.00 per share. What annual

dividend must the company offer?

a. $139.48

b. $3,347.06

c. $107.37

d. $96.73

e. $3,089.34

Title: Constant Growth Model (old div)

4. You are considering buying common stock in Grow On, Inc. The firm yesterday

paid a dividend of $5.20.

You have projected that dividends will grow at a rate of 8.0% per year indefinitely. If

you want an annual

return of 20.0%, what is the most you should pay for the stock now?

a. $28.08

b. $43.33

c. $26.00

d. $46.80

e. $51.13

Title: Constant Growth Model (new div)

5. You are considering buying common stock in Grow On, Inc. You have projected

that the next dividend the

company will pay will equal $4.00 and that dividends will grow at a rate of 5.0% per

year thereafter. If you

would want an annual return of 13.0% to invest in this stock, what is the most you

should pay for the stock

now?

a. $30.77

b. $52.50

c. $50.00

d. $32.31

e. $54.63 133

Title: Supernormal growth (two years g(s))

6. Growing, Inc. is a firm that is experiencing rapid growth. The firm yesterday paid

a dividend of $7.50. You

believe that dividends will grow at a rate of 24.0% per year for two years, and then

at a rate of 5.0% per year

thereafter. You expect the stock will sell for $46.57 in two years. You expect an

annual rate of return of 18.0%

on this investment. If you plan to hold the stock indefinitely, what is the most you

would pay for the stock

now?

a. $89.91

b. $72.85

c. $49.61

d. $61.52

e. $83.06

Title: Supernormal growth (three years g(s))

7. Growing, Inc. is a firm that is experiencing rapid growth. The firm yesterday paid

a dividend of $5.60. You

believe that dividends will grow at a rate of 24.0% per year for three years, and

then at a rate of 10.0% per year

thereafter. You expect that the stock will sell for $177.59 in three years. You expect

an annual rate of return of

18.0% on this investment. If you plan to hold the stock indefinitely, what is the

most you would pay for the

stock now?

a. $107.92

b. $94.29

c. $126.66

d. $79.63

e. $116.83

8. Growing, Inc. is a firm that is experiencing rapid growth. The firm yesterday paid

a dividend of $8.00. You

believe that dividends will grow at a rate of 22.0% per year for years one and two,

15.0% per year for years

three and four, and then at a rate of 9.0% per year thereafter. If you expect an

annual rate of return of 21.0% on

this investment, what is the most you would pay for the stock now?

a. $130.52

b. $106.07

c. $113.03

d. $98.00

e. $89.41

Title: Constant Growth Model (old div - CAPM)

9. You are considering buying common stock in Grow On, Inc. The firm yesterday

paid a dividend of $4.70.

You have projected that dividends will grow at a rate of 6.0% per year indefinitely.

The firm's beta is 2.39, the

risk-free rate is 4.0%, and the market return is 10.9%. What is the most you should

pay for the stock now?

a. $22.94

b. $32.44

c. $34.38

d. $24.31

e. $37.56 134

Title: Constant Growth Model (new div - CAPM)

10. You are considering buying common stock in Grow On, Inc. You have projected

that the next dividend the

company will pay will equal $7.60 and that dividends will grow at a rate of 6.0% per

year thereafter. The firm's

beta is 0.93, the risk-free rate is 6.1%, and the market return is 13.6%. What is the

most you should pay for the

stock now?

a. $107.34

b. $113.79

c. $58.10

d. $61.59

e. $117.28

Title: Free cash flow (constant growth)

11. You are considering buying common stock in Grow On, Inc. You have calculated

that the firm's free cash

flow was $8.10 million last year. You project that free cash flow will grow at a rate of

6.0% per year

indefinitely. The firm currently has outstanding debt and preferred stock with a total

market value of $9.22

million. The firm has 1.20 million shares of common stock outstanding. If the firm's

cost of capital is 25.0%,

what is the most you should pay per share for the stock now?

a. $35.97

b. $37.66

c. $45.19

d. $29.98

e. $49.37

Title: FCF(supernormal growth)

12. You are considering buying common stock in Super Growth, Inc. You have

calculated that the firm's free

cash flow was $6.20 million last year. You project that free cash flow will grow at a

rate of 20.0% per year for

the next three years, and then 6.0% per year indefinitely thereafter. The firm

currently has outstanding debt and

preferred stock with a total market value of $26.60 million. The firm has 1.68

million shares of common stock

outstanding. If the firm's cost of capital is 19.0%, what is the most you should pay

per share for the stock now?

a. $76.59

b. $42.12

c. $15.83

d. $70.75

e. $26.28

1.

N I ***PV*** FV PMT

1000 10 1330 (700)(0.19)

2.

N ***I*** PV FV PMT

1000 14.33 -907 (1000)(0.13)

3.

N I PV FV ***PMT***

1000 17 -569 96.73

4.

()

46.80

0.20 0.08

5.20(1 0.08)

kg

D1g

P

s

0

0

=

+

=

+

=135

5.

50.00

0.13 0.05

4.00

kg

D

P

s

1

0

=

=

6.

D1 = 7.50(1+0.24) = 9.30

D2 = 9.30(1+0.24) = 11.532

P2 = [11.532(1+0.05)]/(0.18-0.05) = 93.14

CF0 = 0

CF1 = 9.30

CF2 = 11.532 + 93.14

I = 18

NPV = 83.06

TI83: npv(18,0,{9.30,104.672})

7.

D1 = 5.60(1+0.24) = 6.944

D2 = 6.944(1+0.24) = 8.611

D3 = 8.611(1+0.24) = 10.677

P3 = [10.677(1+0.10)]/(0.18-0.10) = 146.81

CF0 = 0

CF1 = 6.944

CF2 = 8.611

CF3 = 10.677 + 146.81

I = 18

NPV = 107.92

TI83: npv(18,0,{6.944,8.611,157.487})

8.

D1 = 8.00(1+0.22) = 9.76

D2 = 9.76(1+0.22) = 11.907

D3 = 11.907(1+0.15) = 13.6933

D4 =13.6933(1+0.15) = 15.7473

P4 = [15.7473(1+0.09)]/(0.21-0.09) = 143.04

CF0 = 0

CF1 = 9.76

CF2 = 11.907

CF3 = 13.6933

CF4 = 15.7473 + 143.04 = 158.785

I = 21

NPV = 98.00

TI83: npv(21,0,{9.76,11.907,13.6933,158.785}) 136

9.

ki

= kRF + bi

(kM kRF)

ki

= 4.0% + 2.39(10.9% - 4.0%) = 20.491%

()

34.38

0.20491 0.06

4.70(1 0.06)

kg

D1g

P

s

0

0

=

+

=

+

=

10.

ki

= kRF + bi

(kM kRF)

ki

= 6.1% + 0.93(13.6% - 6.1%) = 13.08%

107.34

0.1308 0.06

7.60

kg

D

P

s

1

0

=

=

11.

Let V0 represent the total value of the firm based on the free cash flow model.

()

45.19

0.25 0.06

8.10(1 0.06)

kg

FCF 1 g

V

s

0

0

=

+

=

+

=

Value of firm = value of debt and preferred + value of equity

45.19 = 9.22 + value of equity

value of equity = 35.97

value per share = (total value)/(number of shares)

value per share = (35.97)/(1.2) = 29.98

12.

FCF1 = 6.2(1+0.20) = 7.44

FCF2 = 7.44(1+0.20) = 8.928

FCF3 = 8.928(1+0.20) = 10.7136

P3 = [10.7136(1+0.06)]/(0.19-0.06) = 87.36

CF0 = 0

CF1 = 7.44

CF2 = 8.928

CF3 = 10.7136+ 87.36

I = 19

NPV = 70.755

TI83: npv(19,0,{7.44,8.928,98.0736})

Value of firm = value of debt and preferred + value of equity

70.755 = 26.60 + value of equity

value of equity = 44.155

value per share = (total value)/(number of shares)

value per share = (44.155)/(1.68) = 26.28

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