BU283 Final - Important Questions

Question 1 The common stock of Leaning Tower of Pita, Inc., a restaurant chain, will generate the following payoffs to investors next year: State Boom Normal Economy Recession Dividend $5 $2 0 Stock Price $195 $100 0 The company goes out of business if a recession hits. Calculate the expected rate of return and standard deviation of return to Leaning Tower of Pita shareholders. Assume for simplicity that the three possible states of the economy are equally likely. The stock is selling today for $90. Note 1: The formulas for computing an expectation and a standard deviation of a random variable can be found in Appendix 3 of Lecture 3. Note 2: A return on a stock is defined as follows. Consider buying a stock at time 0 at price Po and holding it between years 0 and 1. Next year's price is P, and next year's dividend is D₁. Your return is R=D₁ + (P₁-P₁) P₁

12 ts 03:41:18 Metallica Bearings, Incorporated, is a young start-up company. No dividends will be paid on the stock over the next nine years because the firm needs to plow back its earnings to fuel growth. The company will pay a dividend of $20 per share 10 years from today and will increase the dividend by 4 percent per year thereafter. If the required return on this stock is 10 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Current share price

During the previous year, Leveraged Inc. paid $119 million of interest expense, and its average rate of interest for the year was 8.0%. The company's ROE is 11.1 %, and it pays no dividends. Estimate next year's interest expense assuming that interest rates will fall by 24% and the company keeps a constant equity multiplier. Question content area bottom Part 1 Next year's estimated interest expense is $___________   enter your response below. (Round to the nearest dollar.)

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31. Nonconstant Growth. Phoenix Industries has pulled off a miraculous recovery. Four years ago it was near bankruptcy. Today, it announced a $1 per share dividend to be paid a year from now, the first dividend since the crisis. Analysts expect dividends to increase by $1 a year for another years. After the third year (in which dividends are $3 per share), dividend growth is expected to settle down to a more moderate long-term growth rate of 6%. If the firm's investors expect to earn a return of 14% on this stock, what must be its price? (LO7-2) 2

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еВook Problem Walk-Through Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Computech to begin paying dividends, beginning with a dividend of $1.25 coming 3 years from today. The dividend should grow rapidly-at a rate of 32% per year-during Years 4 and 5, but after Year 5, growth should be a constant 9% per year. If the required return on Computech is 17%, what is the value of the stock today? Do not round intermediate calculations. Round your answer to the nearest cent.

12. Problem 9.10 (Valuation of a Declining Growth Stock) eBook Maxwell Mining Company's ore reserves are being depleted, so its sales are falling. Also, because its pit is getting deeper each year, its costs are rising. As a result, the company's earnings and dividends are declining at the constant rate of 8% per year. If Do = $4 and rs = 11%, what is the value of Maxwell Mining's stock? Round your answer to the nearest cent. 2$

The common stock of Leaning Tower of Pita, Inc., a restaurant chain, will generate the following payoffs to investors next year: Dividend Stock Price $8 Boom Normal economy Recession Probability 0.35 0.5 0.15 0 $198 103. 10 The company goes out of business if a recession hits. Calculate the expected rate of return and standard deviation of return to Leaning Tower of Pita share-holders. The stock is selling today for $93. (Round your answers to 2 decimal places.) Expected rate of return Standard deviation

This problem introduces the concept of “sustainable dividends”: The firm whose financials are illustrated below wishes to maintain cash balances of 80 over the next 5 years. It also desires to issue neither additional stock nor make any changes in its current level of debt. This means that dividends are the plug in the balance sheet. Model this situation (note that for some parameter levels you may get “negative dividends,” indicating that there is no sustainable level of dividends).

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еВook Problem Walk-Through Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Computech to begin paying dividends, beginning with a dividend of $2.00 coming 3 years from today. The dividend should grow rapidly-at a rate of 23% per year -during Years 4 and 5, but after Year 5, growth should be a constant 5% per year. If the required return on Computech is 13%, what is the value of the stock today? Do not round intermediate calculations. Round your answer to the nearest cent. $

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The VSE Corporation currently pays no dividend because of depressed earnings. A recent change in management promises a brighter future. Investors expect VSE to pay a dividend of $1.5 next year (the end of year 1). This dividend is expected to increase to $2.75 the following year and to grow at a rate of 13 percent per annum for the following 2 years (years 3 and 4). Chuck Brown, a new investor, expects the price of the stock to increase 55 percent in value between now (time zero) and the end of year 3. If Brown plans to hold the stock for 2 years and requires a rate of return of 17 percent on his investment, what value would he place on the stock today? Use Table II to answer the question. Do not round intermediate calculations. Round your answer to the nearest cent. $  ?

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Problem 1 Pinecrest Inc. does not currently pay dividends. The company will start with a $3.50 dividend at the end of year five and grow it by 14% for each of the next eight years. After eight years of growth, it will fix its dividend at $10.00 forever. If you want a 20% return on this stock, what should you pay today, given this future dividend stream?

Question 1 Chief Medical, Inc. is a little-known producer of heart pacemakers. The earnings and dividend growth prospects of the company are disputed by analysts. Albert Bender at Goldman Sachs is forecasting 5% growth in dividends indefinitely. However, Mary Montgomery at Morgan Stanley is predicting a 20% growth in dividends, but only for the next three years, after which the growth rate is expected to be 4% forever. The Chief Medical annual dividend per share was $3.00 for the most recent 12 months and was paid recently. Stocks with similar risks currently are priced to provide a 14% rate of return. a. What is the intrinsic value of a share of the stock according to Albert? b. What is the intrinsic value of a share of the stock according to Mary?   Question 2 MusicTogether.com will pay out its first dividend, $2.00, one year from today. Analysts expect annual dividends to grow at a rate of 15% per year for each of the following two years (year 2 through year 3) after which a normal…