6.8 Chapter 6 HW - Problem Mastery

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6.8 Chapter 6 HW - Problem Mastery 1) The main vote that shareholders have is to elect the Board of Directors True 2) In addition to voting, shareholders also have a claim on the firm’s assets, after all debts have been paid. True 3) You are considering investing in a firm The dividend on the company’s stock has not changed in the past ten years and most likely will not change in the foreseeable future. In this case, the most appropriate stock valuation model would be the _________ model. Zero Growth 4) In the formula r= (D 1 /P 0) + g, what does g represent? the expected price appreciation yield from a common stock 5) A stock is expected to pay dividends of $ 14 per share for the foreseeable future. If the appropriate discount rate is 5.9 % then what should be the price of this stock? Calculation of price of the share:formula, Price of the stock = Dividend / Required rate of return = 14 / .059 = 237.28813559 = 237.29 6) Common stock can be valued using the perpetuity formula if the: dividends are not expected to grow 7) ABC Inc. will pay a dividend of $1.32 per share on its common stock at the end of this year. If the expected long-term growth rate for this company is 1.74% and investors require a 4.34% rate of return, what is the price of ABC Inc. stock? Current price=D1/(Required return-Growth rate) = 1.32 / (.0434- .0174)

= 50.769230 = 50.77 8) Campbell Soup stock currently sells for $27.28 per share and is expected to pay a year-end dividend of $2.56. If Campbell’s constant growth rate is 3.8%, calculate the expected rate of return. Expected rate of return = [D1 / P0] + g Expected rate of return = [$2.56 / $27.28] + 0.038 Expected rate of return = 0.13184164 or 13.18 9. Which of the following statements is correct about a stock currently selling for $50 per share that has 16% expected return and a 10% expected capital appreciation? a. It is expected to pay $3 in annual dividends Value of Shares = 50 = D1 / (0.16 - 0.10) 50 = D1 / 0.06 D1 = 50 * 0.06 D1 = 3 Dividend next year will be $3 10) A stock’s ______ is found by dividing the stock’s annual dividend by its closing price. Current yield 11) Your company is estimated to make dividends payments of $2.9 next year, $3.5 the year after, and $4.4 in the year after that. The dividends will then grow at a constant rate of 5% per year. If the discount rate is 9% then what is the current stock price? Value after year 3=(D3*Growth rate)/(Discount rate-Growth rate) =(4.4*1.05)/(0.09-0.05) =$115.5 Hence current price=Future dividend and value*Present value of discounting factor(rate%,time period) =2.9/1.09+3.5/1.09^2+4.4/1.09^3+115.5/1.09^3 =$98.19(Approx)

12) A stock will pay no dividends for the next 7 years. Then it will pay a dividend of $8.56 growing at 4.53%. The discount rate is 10.1%. What should be the current stock price? Price of stock after 5 Years = D6 / [ Ke - g ] D6 - Div after 6 Years P5 - Price after 5 Years g - Growth Rate Particulars Amount nth Period 8 D6 $ 8.56 Growth rate 4.53% Ke 10.1% Price of Stock is nothing but PV of CFs from it. P5 = D6 / [ Ke - g ] =8.56/(.101-.0453) =8.56/(0.0557) =153.68 Price Today: Present Value: Present value is current value of Future cash flows discounted at specified discount Rate. PV = FV / (1+r)^n Where r is Int rate per period n - No. of periods Particulars Amount Future Value $ 153.68 Int Rate 10.1% Periods 7 Present Value = Future Value / ( 1 + r )^n = $ 153.68/ ( 1 + 0.101) ^ 7 = $ 153.68/ ( 1.101 ) ^ 7

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= $ 153.68 / 1.96115189 = $ 78.36 Price today is $78.36 13) A share of preferred stock pays a dividend of $9 and has a discount rate of 6.9%. What is the price? Preferred stock price = Annual Dividend / Discount rate Preferred stock price = $9 / 0.069 Preferred stock price = $130.43 So, The price of the share of Preferred stock is $130.43 14) Which of the following is a true statement regarding publicly traded stocks and bonds? The constant dividend growth model can be used to value stocks only if the dividend growth rate remains constant. 15) Matching those following investor behaviors theories Regret Theory  deals with the emotional reactions people experience after realizing they have made an error in judgement Prospect Theory  suggest that people express a different degree of emotion when toward gains than losses Herding  some investors rationalize their decisions to buy certain stocks with "everyone else is doing it" Anchoring  the tendency of investors to place more value on recent or even irrelevant information Confirmation Bias  tendency to interpret new evidence as confirmation of ones existing beliefs or theories. 16) Match the investment types

Mutual Fund  investments that pools an investors money together with other investors to purchase shares of a collection of stocks, bonds, or other securities, referred to as a portfolio. Index Fund  a type of mutual fund with a portfolio constructed to match the return performance of a financial market index.