Exam 11: Introduction to Security Valuation

Using the constant growth model, an increase in the required rate of return from 14 to 18 percent combined with an increase in the growth rate from 8 to 12 percent would cause the price to

Exhibit 12.9 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The aggregate market currently has a retention ratio of 60 percent, a required rate of return of 12 percent, and an expected growth rate for dividends of 4 percent. -If the estimated value of an asset is greater than the market price, you would want to buy the investment.

The beta for the DAK Corporation is 1.25. If the yield on 30 year T-bonds is 5.65%, and the long term average return on the S&P 500 is 11%. Calculate the required rate of return for DAK Corporation.

In 2004, Montpelier Inc. issued a $100 par value preferred stock that pays a 9 percent annual dividend. Due to changes in the overall economy and in the company's financial condition investors are now requiring a 10 percent return. What price would you be willing to pay for a share of the preferred if you receive your first dividend one year from now?

Micro Corp. just paid dividends of $2 per share. Assume that over the next three years dividends will grow as follows, 5% next year, 15% in year two, and 25% in year 3. After that growth is expected to level off to a constant growth rate of 10% per year. The required rate of return is 15%. Calculate the intrinsic value using the multistage model.

Exhibit 12.9 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The aggregate market currently has a retention ratio of 60 percent, a required rate of return of 12 percent, and an expected growth rate for dividends of 4 percent. -A bond typically pays interest payments every six months equal to the coupon rate times the face value of the bond.

The growth rate of equity earnings without external financing is equal to

Exhibit 11.3 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) A large grocery chain is reevaluating its bonds since it is planning to issue a new bond in the current market. The firm's outstanding bond issue has 6 years remaining until maturity. The bonds were issued with a 6 percent coupon rate (paid semiannually) and a par value of $1,000. Because of increased risk the required rate has risen to 10 percent. -Refer to Exhibit 11.3. What will be the value of these securities in one year if the required return declines to 8 percent?

Exhibit 12.9 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The aggregate market currently has a retention ratio of 60 percent, a required rate of return of 12 percent, and an expected growth rate for dividends of 4 percent. -The importance of an industry's performance on an individual stock's performance varies across industries.

Exhibit 11.5 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The National Motor Company's last dividend was $1.25 and the directors expect to maintain the historic 4 percent annual rate of growth. You plan to purchase the stock today because you feel that the growth rate will increase to 7 percent for the next three years and the stock will then reach $25.00 per share. -Refer to Exhibit 11.5. How much should you be willing to pay for the stock if you require a 16 percent return?

Exhibit 11.5 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The National Motor Company's last dividend was $1.25 and the directors expect to maintain the historic 4 percent annual rate of growth. You plan to purchase the stock today because you feel that the growth rate will increase to 7 percent for the next three years and the stock will then reach $25.00 per share. -Refer to Exhibit 11.5. How much should you be willing to pay for the stock if you feel that the 7 percent growth rate can be maintained indefinitely and you require a 16 percent return?

Exhibit 11.2 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) A major manufacturer is reevaluating its bonds since it is planning to issue a new bond in the current market. The firm's outstanding bond issue has 7 years remaining till maturity. The bonds were issued with an 8 percent coupon rate (paid quarterly) and a par value of $1,000. The required rate of return is 10 percent. -Refer to Exhibit 11.2. What is the current value of these securities?

Exhibit 12.9 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The aggregate market currently has a retention ratio of 60 percent, a required rate of return of 12 percent, and an expected growth rate for dividends of 4 percent. -The three step valuation process consists of (1) analysis of alternative economies and markets, (2) analysis of alternative industries and (3) analysis of industry influences.

Exhibit 11.7 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider a firm that has just paid a dividend of $1.5. An analyst expects dividends to grow at a rate of 9% per year for the next three years. After that dividends are expected to grow at a normal rate of 5% per year. Assume that the appropriate discount rate is 7%. -Tayco Corporation has just paid dividends of $3 per share. The earnings per share for the company was $4. If you believe that the appropriate discount rate is 15% and the long term growth rate in dividends is 6%, and earnings is 6%, the firm's P/E ratio is

A company has a dividend payout ratio of 35 percent. If the company's return on equity is 15 percent, what is the expected growth rate if no new outside financing is used?

Which of the following is an underlying assumption of the constant growth dividend discount model (DDM)?

What is the value to you of a 10 percent coupon bond with semi-annual coupon payments and a par value of $10,000 that matures in 20 years if you require an 8 percent return?

The process of fundamental valuation requires estimates of all the following factors, except

Exhibit 12.9 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The aggregate market currently has a retention ratio of 60 percent, a required rate of return of 12 percent, and an expected growth rate for dividends of 4 percent. -Fundamentalists typically use the "Bottom-Up Approach" whereas technicians use the "Top-Down Approach" to the valuation process.

Exhibit 11.7 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider a firm that has just paid a dividend of $1.5. An analyst expects dividends to grow at a rate of 9% per year for the next three years. After that dividends are expected to grow at a normal rate of 5% per year. Assume that the appropriate discount rate is 7%. -Refer to Exhibit 11.7. The future price of the stock in year 3 is