FIN 500

8-1A.   (Preferred Stock Valuation) What is the value of a preferred stock where the dividend rate is 16 percent on a $100 par value? The appropriate discount rate for a stock of this risk level is 12 percent.

8-2A.   (Preferred Stockholder Expected Return) Shewmaker’s preferred stock is selling for $55.16 and pays $2.35 in dividends. What is your expected rate of return if you purchase the security at the market price?

8-3A.   (Preferred Stockholder Expected Return) You own 250 shares of McCormick Resources’ preferred stock, which currently sells for $38.50 per share and pays annual dividends of $3.25 per share.

a.         What is your expected return?

b.         If you require an 8 percent return, given the current price, should you sell or buy more stock?

8-4A.   (Common Stock Valuation) You intend to purchase Bama, Inc., common stock at $52.75 per share, hold it one year, and sell after a dividend of $6.50 is paid. How much will the stock price have to appreciate if your required rate of return is 16 percent?

8-5A.   (Common Stockholder Expected Return) Blackburn & Smith’s common stock currently sells for $23 per share. The company’s executives anticipate a constant growth rate of 10.5 percent and an end-of-year dividend of $2.50.

a.         What is the expected rate of return if you buy the stock for $23?

b.         If you require a 17 percent return, should you purchase the stock?

8-6A.   (Common Stock Valuation) Gilliland Motor, Inc., paid a $3.75 dividend last year. At a constant growth rate of 6 percent, what is the value of the common stock if the investors require a 20 percent rate of return?

8-7A.   (Measuring Growth) Given that a firm’s return on equity is 24 percent and management plans to retain 60 percent of earnings for investment purposes, what will be the firm’s growth rate?

8-8A.   (Common Stockholder Expected Return) The common stock of Bouncy-Bob Moore Co. is selling for $33.84. The stock recently paid dividends of $3 per share and has a projected constant growth rate of 8.5 percent. If you purchase the stock at the market price, what is your expected rate of return?

8-9A.   (Common Stock Valuation) Honeybee common stock is expected to pay $1.85 in dividends next year, and the market price is projected to be $40 by year end. If the investor’s required rate of return is 12 percent, what is the current value of the stock?

8-10A. (Common Stock Expected Rate of Return) The market price for M. Simpson & Co.’s common stock is $44. The price at the end of one year is expected to be $47, and dividends for next year should be $2. What is the expected rate of return?

8-11A. (Preferred Stock Valuation) Gree’s preferred stock is selling for $35 in the market and pays a $4 annual dividend.

a.         What is the expected rate of return of the stock?

b.         If an investor’s required rate of return is 10 percent, what is the value of the stock for the investor?

c.         Should the investor acquire the stock?

8-12A. (Common Stock Valuation) The common stock of KPD paid $1 in dividends last year. Dividends are expected to grow at an 8 percent annual rate for an indefinite number of years.

a.         If KPD’s current market price is $25, what is the stock’s expected rate of return?

b.         If your required rate of return is 11 percent, what is the value of the stock for you?

c.         Should you make the investment?

8-13A. (Comprehensive Problem in Valuing Securities) You are considering three investments. The first is a bond that is selling in the market at $1,200. The bond has a $1,000 par value, pays interest at 14 percent, and is scheduled to mature in 12 years. For the bonds of this risk class you believe that a 12 percent rate of return should be required. The second investment that you are analyzing is a preferred stock ($100 par value) that sells for $80 and pays an annual dividend of $12. Your required rate of return for this stock is 14 percent. The last investment is a common stock ($35 par value) that recently paid a $3 dividend. The firm’s earnings per share have increased from $4 to $8 in 10 years, which also reflects the expected growth in dividends per share for the indefinite future. The stock is selling for $25, and you think a reasonable required rate of return for the stock is 20 percent.

a.         Calculate the value of each security based on your required rate of return.

b.         Which investment(s) should you accept? Why?

c.         1.         If your required rates of return changed to 14 percent for the bond, 16 percent for the preferred stock, and 18 percent for the common stock, how would your answers change to parts (a) and (b)?

            2.         Assuming again that your required rate of return for the common stock is 20 percent, but the anticipated constant growth rate changes to 12 percent, would your answers to parts (a) and (b) be different?

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