Exam 20: An Introduction to Security Valuation

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.

Using the constant growth model, an increase in the required rate of return from 14 to 15% combined with an increase in the growth rate from 6 to 7% would cause the price to

The importance of an industry's performance on an individual stock's performance varies across industries.

Using the constant growth model, a decrease in the required rate of return from 15 to 13% combined with an increase in the growth rate from 5 to 6% would cause the price to

The P/E ratio for BMI Corporation 21, and the P/S ratio is 5.2. The industry P/E ratio is 35 and the industry P/S ratio is 7.5. Based on relative valuation, what is the BMI?

The value of preferred stock can be calculated by dividing its dividend by the required rate of return.

Which of the following is not considered a basic economic force?

The real risk free rate depends on the real growth in the economy and for short period by temporary tightness or ease in capital markets.

Exhibit 20-6 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Consider a firm that has just paid a dividend of $2. An analyst expects dividends to grow at a rate of 8% per year for the next five 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 20-6. What is the present value today of dividends for years 1 to 5?

Exhibit 20-3 USE THE FOLLOWING INFORMATION FOR THE NEXT 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% coupon rate (paid semiannually) and a par value of $1,000. Because of increased risk the required rate has risen to 10%. -Refer to Exhibit 20-3. What will be the value of these securities in one year if the required return declines to 8%?

Exhibit 20-1 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) A major retailer is reevaluating its bonds since it is planning to issue a new bond in the current market. The firm's outstanding bond issue has 8 years remaining until maturity. The bonds were issued with a 6.5% coupon rate (paid quarterly) and a par value of $1,000. The required rate of return is 4.25%. -Refer to Exhibit 20-1. What will be the value of these securities in one year if the required return is 7%?

A preferred stock is a perpetuity.

Which of the following is correct?

Exhibit 20-4 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Davenport Corporation's last dividend was $2.70 and the directors expect to maintain the historic 3% annual rate of growth. You plan to purchase the stock today because you feel that the growth rate will increase to 5% for the next three years and the stock will then reach $25 per share. -Refer to Exhibit 20-4. How much should you be willing to pay for the stock if you feel that the 5% growth rate can be maintained indefinitely and you require a 17% return?

Exhibit 20-6 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Consider a firm that has just paid a dividend of $2. An analyst expects dividends to grow at a rate of 8% per year for the next five 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 20-6. What are the dividends for years 1, 2, and 3?

What is the value of a 10% semi-annual coupon bond with a par value of $1,000 that matures in 5 years and has a required rate of return of 9%?

Exhibit 20-7 USE THE FOLLOWING INFORMATION FOR THE NEXT 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 20-7. What is the price of the stock today (P?)?

XCEL Corporation paid a dividend yesterday for $1.50. They expect to pay dividends annually at a constant 6% annual growth rate indefinitely. If the required rate of return on this investment is 12%, what is the current value of this common stock?

Exhibit 20-7 USE THE FOLLOWING INFORMATION FOR THE NEXT 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 20-7. What are the dividends for years 1, 2, and 3?

Given an optimistic economic and stock-market outlook for a country, the investor should underweight the allocation to this country in his/her portfolio.