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10.6 End-of-Chapter Problems

PLEASE NOTE: This book is currently in draft form; material is not final.

Exercises

  1. 8% preferred stock is currently trading at $133.33. What implicit return is the market demanding?
  2. If the market demands a return of 11% on a preferred stock with a 7% coupon, at what price will it trade?
  3. A stock is expected to pay $2 in dividends every year. At what price must it trade to yield a return on equity of 9%?
  4. A stock is expected to pay $1 in dividends next year. Dividends are expected to grow in future years at a rate of 5% per year. If the market demands a return of 11%, at what price should the stock trade? If the market demanded return drops to 10%, at what price should the stock trade?
  5. A stock paid $1.50 in dividends last year. The dividends have been growing by 3% on average over the past 10 years, and this trend is expected to continue indefinitely. If other comparable stocks are returning 9%, at what price should the stock trade?
  6. A $30 stock is expected to pay a dividend of $2 next year, and dividends are expected to grow at 2% per year thereafter. What is the expected market return for this stock?
  7. ABC Company has hit on hard times, and is expected to shut down. As inventory is liquidated, yearly dividends are expected to be $2, $3, and $4 in years 1, 2, and 3, respectively. After year 3, the company will have no value. What should the stock be worth if the market demands an 8% return?
  8. DEF Inc. is expected to pay dividends of $1, $1.50, and $2 during the next three years. After that, dividends are expected to grow at 5% per year. If the market demands a return of 11%, what should be the price of DEF in three years? What should be its stock price today?
  9. GHI Ltd. is not currently paying a dividend. In five years, it expects to pay a dividend of $0.50, and dividends are expected to grow at 6% a year afterward. If the return demanded is 12%, what should GHI be worth today?
  10. JKL Corp. has earnings of $1.38 per share. MNO Corp. is a close competitor, with $1.59 earnings per share. If MNO stock is currently trading at $39.75 and you believe that the stocks are comparable, what would be a reasonable price expectation for JKL stock?
  11. Analysts expect PQR Inc. to earn $1.15 per share this year. The stock is currently trading at $33.35. When PQR surprises analysts by outperforming by $0.30 per share, by how much should the stock price increase? (Assume the P/E ratio will remain constant.)
  12. STU Company expects $2 million of FCF next year. Growth is expected to be 3% per year, and the WACC is 7%. What is the value of the company? If the company has no debt and 2 million shares of stock outstanding, what should be its stock price?
  13. VWX Ltd. had FCF of $1.5 million last year. Over the next five years, FCF is expected to grow at 10% per year. Afterward, FCF growth will slow to 4% per year. If the WACC is 9%, there are 1 million shares outstanding, and the company has issued $10 million market value of debt and $5 million market value of preferred stock, what is a share of VWX stock worth?