Fundamentals of Financial Management (Concise 6th Edition)

294 Part 3 Financial Assets

next 2 years, at 13% the following year, and at a constant rate of 6% during Year 4 and

thereafter. Its last dividend was $1.15, and its required rate of return is 12%.

a. Calculate the value of the stock today.

b. Calculate Pˆ 1 and Pˆ 2.

c. Calculate the dividend and capital gains yields for Years 1, 2, and 3.

It is frequently stated that the one purpose of the preemptive right is to allow individuals

to maintain their proportionate share of the ownership and control of a corporation.

a. How important do you suppose control is for the average stockholder of a firm whose

shares are traded on the New York Stock Exchange?

b. Is the control issue likely to be of more importance to stockholders of publicly owned

or closely held (private) firms? Explain.

Is the following equation correct for finding the value of a constant growth stock? Explain.

Pˆ 0!

D 0

_____r

s^ " g

If you bought a share of common stock, you would probably expect to receive dividends

plus an eventual capital gain. Would the distribution between the dividend yield and the

capital gains yield be influenced by the firm’s decision to pay more dividends rather than

to retain and reinvest more of its earnings? Explain.

Two investors are evaluating GE’s stock for possible purchase. They agree on the expected

value of D 1 and on the expected future dividend growth rate. Further, they agree on the

riskiness of the stock. However, one investor normally holds stocks for 2 years, while the

other holds stocks for 10 years. On the basis of the type of analysis done in this chapter,

should they both be willing to pay the same price for GE’s stock? Explain.

A bond that pays interest forever and has no maturity is a perpetual bond. In what respect

is a perpetual bond similar to a no-growth common stock? Are there preferred stocks that

are evaluated similarly to perpetual bonds and other preferred stocks that are more like

bonds with finite lives? Explain.

DPS CALCULATION Warr Corporation just paid a dividend of $1.50 a share (that is,

D 0 " $1.50). The dividend is expected to grow 7% a year for the next 3 years and then at

5% a year thereafter. What is the expected dividend per share for each of the next 5 years?

CONSTANT GROWTH VALUATION Thomas Brothers is expected to pay a $0.50 per share

dividend at the end of the year (that is, D 1 " $0.50). The dividend is expected to grow at a

constant rate of 7% a year. The required rate of return on the stock, rs, is 15%. What is the

stock’s current value per share?

CONSTANT GROWTH VALUATION Harrison Clothiers’ stock currently sells for $20.00

a share. It just paid a dividend of $1.00 a share (that is, D 0 " $1.00). The dividend is

expected to grow at a constant rate of 6% a year. What stock price is expected 1 year from

now? What is the required rate of return?

NONCONSTANT GROWTH VALUATION Hart Enterprises recently paid a dividend, D 0 , of

$1.25. It expects to have nonconstant growth of 20% for 2 years followed by a constant rate

of 5% thereafter. The firm’s required return is 10%.

a. How far away is the terminal, or horizon, date?

b. What is the firm’s horizon, or terminal, value?

c. What is the firm’s intrinsic value today, Pˆ 0?

CORPORATE VALUATION Smith Technologies is expected to generate $150 million in free

cash flow next year, and FCF is expected to grow at a constant rate of 5% per year

QUESTIONSQUESTIONS

9-19-1

9-29-2

9-39-3

9-49-4

9-59-5

PROBLEMPROBLEMSS

Easy 9-19-1

Problems 1–6

Easy

Problems 1–6

9-29-2

9-39-3

9-49-4

9-59-5