Saturday, 17 November 2012

Computer Corp. reinvests 50% of its earnings in the firm. The stock sells for \$55, and the next dividend will be \$2.20 per share. The discount rate is 15%. What is the rate of return on the company’s reinvested funds?

Computer Corp. reinvests 50% of its earnings in the firm. The stock sells for \$55, and the next dividend will be \$2.20 per share. The discount rate is 15%. What is the rate of return on the company’s reinvested funds? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 Rate of return %

Explanation:

Grandiose Growth has a dividend growth rate of 10%. The discount rate is 8%. The end-of-year dividend will be \$5 per share.

Grandiose Growth has a dividend growth rate of 10%. The discount rate is 8%. The end-of-year dividend will be \$5 per share.

 a. What is the present value of the dividend to be paid in year 1? Year 2? Year 3? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

 Present Value Year 1 \$ Year 2 Year 3

Explanation:

Assume that market and book values are equal for current assets, current liabilities, and debt and other long-term liabilities.

Assume that market and book values are equal for current assets, current liabilities, and debt and other long-term liabilities.

 SIMPLIFIED BALANCE SHEET OF GOOD FORTUNES, INC. FOR MAY 31, 2010 (Millions of dollars) Current assets \$ 7,290 Current liabilities \$ 4,651 Plant, equipment and other long-term assets 17,630 Debt and other long-term liabilities 6,452 Shareholders’ equity 13,817 Total assets \$ 24,920 Total liabilities and equity \$ 24,920

 Note: Shares of stock outstanding: 320 million. Book value of equity (per share): 13,817/320 = \$43.18. The stock price is \$77.50.

 a. Construct a market-value balance sheet from the above data. (Be sure to list the assets and liabilities in order of their liquidity. Enter your answers in millions rounded to 2 decimal places.)

 SIMPLIFIED BALANCE SHEET OF GOOD FORTUNES, INC. FOR MAY 31, 2010 (Millions of dollars) Current assets \$ Current liabilities \$ Plant, equipment and other long-term assets Debt and other long-term liabilities Growth opportunities Shareholders' equity Total assets \$ Total liabilities and equity \$

 b. How much extra value shows up on the asset side of the balance sheet? (Enter your answer in millions rounded to 2 decimal places.)

 Extra value on the asset side \$ million

Explanation:
The market value of shareholders' equity is found as the price per share (\$77.50) multiplied by the number of shares outstanding (320 million), or \$24,800,000,000. An additional \$10,983,000,000 shows up on the asset side of the balance sheet (\$24,800,000,000 − 13,817,000,000).

No-Growth Industries pays out all of its earnings as dividends. It will pay its next \$4 per share dividend in a year. The discount rate is 15%.

No-Growth Industries pays out all of its earnings as dividends. It will pay its next \$4 per share dividend in a year. The discount rate is 15%.

 a. What is the price-earnings ratio of the company? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 P/E ratio

 b. What would the P/E ratio be if the discount rate were 10%? (Round your answer to 2 decimal places.)

 P/E ratio

Explanation:

You expect a share of stock to pay dividends of \$1.90, \$2.15, and \$2.40 in each of the next 3 years. You

You expect a share of stock to pay dividends of \$1.90, \$2.15, and \$2.40 in each of the next 3 years. You believe the stock will sell for \$31 at the end of the third year.

 a. What is the stock price if the discount rate for the stock is 10%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 Stock price \$

 b. What is the dividend yield? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 Dividend yield %

Explanation:
 Some values below may show as rounded for display purposes, though unrounded numbers should be used for the actual calculations.

a.
 P0 = \$1.90 + \$2.15 + \$2.40 + \$31 = \$28.60 1.10 (1.10)2 (1.10)3

 b. DIV1/P0 = \$1.90/\$28.60 = 0.0664 = 6.64%

Horse and Buggy Inc. is in a declining industry. Sales, earnings, and dividends are all shrinking at a rate of 10% per year.

Horse and Buggy Inc. is in a declining industry. Sales, earnings, and dividends are all shrinking at a rate of 10% per year.

 a. If r = 15% and DIV1 = \$2, what is the value of a share? (Do not round intermediate calculations.)

 Value of a share \$

 b. What price do you forecast for the stock next year? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 Stock price \$

 c. What is the expected rate of return on the stock? (Do not round intermediate calculations.)

 Expected rate of return %

Explanation:
 a. P0 = DIV1/(r − g) = \$2/[0.15 − (−0.10)] = \$2/0.25 = \$8 b. P1 = DIV2/(r − g) = \$2(1 − 0.10)/0.25 = \$7.20

c.
 Expected rate of return = DIV1 + capital gain = \$2 + (\$7.20 − \$8) = 0.15 = 15% P0 \$8

Arts and Crafts, Inc., will pay a dividend of \$6 per share in 1 year. It sells at \$50 a share and firms in

 Arts and Crafts, Inc., will pay a dividend of \$6 per share in 1 year. It sells at \$50 a share and firms in the same industry provide an expected rate of return of 15%. What must be the expected growth rate of the company’s dividends? (Do not round intermediate calculations.)

 Expected growth rate 3 %

Explanation:
 \$50 = \$6 g = 0.15 − \$6 = 0.03 = 3% 0.15 − g \$50

Integrated Potato Chips paid a \$2.70 per share dividend yesterday. You expect the dividend to grow steadily at a rate of 6% per year.

 Integrated Potato Chips paid a \$2.70 per share dividend yesterday. You expect the dividend to grow steadily at a rate of 6% per year.

 a. What is the expected dividend in each of the next 3 years? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

 Expected Dividend Year 1 \$ Year 2 Year 3

 b. If the discount rate for the stock is 10%, at what price will the stock sell? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 Current price \$

 c. What is the expected stock price 3 years from now? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 Future price \$

 d. If you buy the stock and plan to hold it for 3 years, what payments will you receive? What is the present value of those payments? (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Round your answers to 2 decimal places.)

 Year 1 Year 2 Year 3 DIV \$ \$ \$ Selling price Total cash flow PV of cash flow 