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Fundamentals Of Corporate Finance By Berk, Ch 7

2746 words - 11 pages

Chapter 7
Stock Valuation
Note: All problems in this chapter are available in MyFinanceLab. An asterisk (*) indicates problems with a higher level of difficulty. 1. 15,000 × \$0.27 = \$4050. 2. With cumulative voting, you are able to get proportional representation by putting all of your votes toward 2 directors, allowing you to elect representatives to 2 seats (20% of 10 seats) on the board. With non cumulative voting, you vote on each director individually and without a majority of the shares, you cannot ensure that your representative will win any of the elections (you could lose 80% to 20% in each of the 10 individual elections). 3. To make this easier, assume there are 100 shares of ...view middle of the document...

The cost of capital is then split between the dividend yield at 5% and the capital gains yield at 10%, which together creates the 15% cost of capital. 6. Plan: We can use the constant dividend growth model (Eq. 7.6) with a growth rate of 0 because this preferred stock pays a constant (nongrowing) dividend. Div1 = 3, r = 0.08, g = 0. Execute: P = Div1/(r − g) = 3/(0.08 − 0) = 37.50 Evaluate: To be consistent with the promised dividend and the required return, the price would be \$37.50. 7. Dividend Yield = Div/P = \$1.50/\$20 = 0.075 (7.5%). 8. Plan: We can use Eq. 7.1 to solve for the beginning price we would pay now (P 0) given our expectations about dividends (\$2.80) and future price (\$52.00) and the return we need to expect to earn to be willing to invest 10%. We can use Eq. 7.1 to solve for the price for which you would expect to be able to sell a share of Acap stock in one year given our expectations about dividends (\$3.00) next year and future price (\$52.00) and the return we need to expect to earn to be willing to invest 10%. Given the price you would expect to be able to sell a share of Acap stock for in one year, we can solve for the price you would be willing to pay for a share of Acap stock today if you planned to hold the stock for only one year using the dividend of \$2.80 and the expected return of 10%. Execute: 2 a. P(0) = 2.80/1.10 + (3.00 + 52.00)/1.10 = \$48.00 b. P(1) = (3.00 + 52.00)/1.10 = \$50.00 c. P(0) = (2.80 + 50.00)/1.10 = \$48.00 Evaluate: The price you would be willing to pay for a share of Acap stock today if you held the stock for 2 years or 1 is not affected by the amount of time you hold the stock as can be seen in parts (a) and (c). 9. Plan: We can use Eq. 7.2 to calculate the dividend yield and the capital gain. We can then compute the total expected return by adding the dividend yield to the capital gain. Execute: Dividend Yield = 0.88/22.00 = 4% Capital Gain Rate = (23.54 − 22.00)/22.00 = 7% Total Expected Return = rE = 4% + 7% = 11%

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

Chapter 7

Stock Valuation

83

Evaluate: The stock’s dividend yield of 4% is the expected annual dividend of the stock dividend by its current price. The dividend yield is the percentage return the investor expects to earn from the dividend paid by the stock. The capital gain of 7% reflects the capital gain the investors will earn on the stock, which is the difference between the expected sale price and the original purchase price for the stock. The sum of the dividend yield and the capital gain rate is called the total return of the stock. The total return is the expected return that the investor will earn for a 1-year investment in the stock. 10. Plan: We can use Eq. (7.6) to calculate the price per share and we can use Eq. (5.1) to calculate the quarterly rate from the annual cost of capital. Execute: With the simplifying assumption (as was made in the chapter) that dividends are paid at the end of the year,...

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