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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/(rg) = $2/[0.15 − (−0.10)] = $2/0.25 = $8
 
b.
P1 = DIV2/(rg) = $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
correct %  

Explanation:
$50
=
$6
formula17.mml
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