**Fin
301 written assignment 4**

Chapter 11 Problem Set

Do Problems 1, 2, 3, and 5 on pages 260–261.

1. **The
dividend-growth model may be used to value a stock:**

a) **What is the value of stock
if: **

**D _{0}
= $2 k=10% g=6%**

b) **What is the value of
this stock if the dividend is increased to $3 and the other variables remain
constant? **

c) **What is the value of
this stock if the required return declines to 7.5 percent and the other
variables remain constant?**

d) **What is the value of
this stock if the growth rate declines to 4 percent and the other variables
remain constant? **

e) **What is the value of
this stock if the dividend is increased to $2.30, the growth rate declines to 4
percent, and the required return remains 10 percent?**

2. **Last year Artworks,
Inc. paid a dividend of $3.50. You anticipate that the company’s growth rate is
10 percent and have required rate of return of 15 percent for this type of
equity investment. What is the maximum price you would be willing to pay for
the stock?**

**3.
**

**An**

investor with a required return of 14 percent for very risky investments in

common stock has analyzed three firms and must decide which, if any, to

purchase. The information is as follows:

Firm A B C

Current Earnings $2.00 $3.20 $7.00

Current dividend $1.00

$3.00 $7.50

Expected annual growth in dividends and earnings 7% 2% -1%

Current market price $23 $47 $60

investor with a required return of 14 percent for very risky investments in

common stock has analyzed three firms and must decide which, if any, to

purchase. The information is as follows:

Firm A B C

Current Earnings $2.00 $3.20 $7.00

Current dividend $1.00

$3.00 $7.50

Expected annual growth in dividends and earnings 7% 2% -1%

Current market price $23 $47 $60

**a)
**

**What**

is the maximum price that the investor should pay for each stock based on the

dividend-growth model?

is the maximum price that the investor should pay for each stock based on the

dividend-growth model?

**b)
**

**If**

the investor does buy stock A, what is the implied percentage return?

the investor does buy stock A, what is the implied percentage return?

**c)
**

**If**

the appropriate P/E ratio is 12, what is the maximum price the investor should

pay for each stock? Would your answers be different if the appropriate P/E were

7?

the appropriate P/E ratio is 12, what is the maximum price the investor should

pay for each stock? Would your answers be different if the appropriate P/E were

7?

**d)
**

**What**

does stock C’s negative growth rate imply?

does stock C’s negative growth rate imply?

**5.
**

**Jersey**

Jewel mining has a beta coefficient of 1.2. Currently the risk-free rate is 5

percent and the anticipated return on the market is 11 percent. JJM pays a

$4.50 dividend that is growing at 6 percent annually.

Jewel mining has a beta coefficient of 1.2. Currently the risk-free rate is 5

percent and the anticipated return on the market is 11 percent. JJM pays a

$4.50 dividend that is growing at 6 percent annually.

**a)
**

**What**

is the required return for JJM?

is the required return for JJM?

**b)
**

**Given**

the required return, what is the value of the stock?

the required return, what is the value of the stock?

**c)
**

**If**

the stock is selling for $80, what should you do?

the stock is selling for $80, what should you do?

**d)
**

**If**

the beta coefficient declines to 1.0 what is the new value of the stock?

the beta coefficient declines to 1.0 what is the new value of the stock?

**e)
**

**If**

the price remains $80, what course of action should you take given the

valuation in (d)?

the price remains $80, what course of action should you take given the

valuation in (d)?

**Chapter
14 Problem Set**

**Do
Problems 1 and 2 on page 304.**

**1)
**

**Big**

Oil Inc. has a preferred stock outstanding that pays a $9 annual dividend. If

investors’ required rate of return is 13 percent, what is the market value of

the shares? If the required return declines to 11%, what is the change in the

price of the stock?

Oil Inc. has a preferred stock outstanding that pays a $9 annual dividend. If

investors’ required rate of return is 13 percent, what is the market value of

the shares? If the required return declines to 11%, what is the change in the

price of the stock?

**2) ****What should be the prices of the
following preferred stocks if comparable securities yield 7 %? Why are the valuations different?
a. MN Inc., $8 preferred ($100 par)
b. CH Inc., $8 preferred ($100 par) with mandatory retirement
after 20 years**