Exam 4: The Value of Common Stocks

Galaxy Air, previously a no-growth firm, has two million shares outstanding.Until now, it consistently earned $20 million per year on its assets.(It has no debt and pays out all earnings as dividends.Its cost of capital is 10 percent.) Due to its newly appointed CEO, Galaxy Air is now able to squeeze out 1 percent annual growth by plowing back 5 percent of earnings.Calculate its stock price per share.

Universal Air is a no-growth firm and has two million shares outstanding.It expects to earn a constant $20 million per year on its assets.If it has no debt, all earnings are paid out as dividends, and the cost of capital is 10 percent, calculate the current price per share of the stock.

A large percentage of the total value of a growth stock comes from the present value of its growth opportunities.

Explain the term primary market.

The major secondary market for GE shares is the

The dividend yield reported on finance.yahoo.com is calculated as follows:

The return that is expected by investors from a common stock is also called its market capitalization rate, or cost of equity capital.

World-Tour Co.has just now paid a dividend of $2.83 per share (Div₀); its dividends are expected to grow at a constant rate of 6 percent per year forever.If the required rate of return on the stock is 16 percent, what is the current value of the stock, after paying the dividend?

A company forecasts growth of 6 percent for the next five years and 3 percent thereafter.Given last year's free cash flow was $100, what is its horizon value (PV looking forward from year 4) if the company cost of capital is 8 percent?

Discuss the general principle at work in valuing a common stock.

Michigan Co.just paid a dividend of $2 per share.Analysts expect future dividends to grow at 20 percent per year for the next four years and then grow at 6 percent per year thereafter.Calculate the expected dividend in year 5.

Most exchange traded funds are not actively managed.

Briefly explain why Microsoft experienced a significant drop in price when it announced its first-ever regular dividend along with huge profits.

The In-Tech Co.just paid a dividend of $1 per share.Analysts expect its dividend to grow at 25 percent per year for the next three years and then 5 percent per year thereafter.If the required rate of return on the stock is 18 percent, what is the current value of the stock?

The following are foreign companies that are traded on the New York Stock Exchange:

The growth rate in dividends is a function of two ratios.They are

The cost of equity capital equals the dividend yield minus the growth rate in dividends for a constant dividend growth stock.

The following is an example of a dealer market:

It is not possible to value a firm that has a supernormal (variable) growth rate for the first few years of its life.

Briefly explain the term market capitalization rate.