Exam 11: Security Valuation Principles

Using the constant growth model,an increase in the required rate of return from 19 to 17 percent combined with an increase in the growth rate from 11 to 9 percent would cause the price to

In 2004,Swisten Inc.issued a $150 par value preferred stock that pays an 8 percent annual dividend.Due to changes in the overall economy and in the company's financial condition investors are now requiring an 15 percent return.What price would you be willing to pay for a share of the preferred if you receive your first dividend one year from now?

Exhibit 11.7 Use the Information Below for the Following 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 11.7.The price of the stock today (P?)is

In 2004,Smiths Corp.issued a $50 par value preferred stock that pays a 6 percent annual dividend.Due to changes in the overall economy and in the company's financial condition investors are now requiring an 7 percent return.What price would you be willing to pay for a share of the preferred if you receive your first dividend one year from now?

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%?

An equity investor's required rate of return is influenced by the economy's real risk-free rate,the expected rate of inflation,and a risk premium.

Micro Corp.just paid dividends of $2 per share.Assume that over the next three years dividends will grow as follows,5% next year,15% in year two,and 25% in year 3.After that growth is expected to level off to a constant growth rate of 10% per year.The required rate of return is 15%.Calculate the intrinsic value using the multistage model.

Discounted cash flow techniques for equity valuation may use one of the following: (1)dividends,(2)Free cash flow or (3)coupons.

Exhibit 11.8 Use the Information Below for the Following Problem(S) Fast Grow Corporation is expecting dividends to grow at a 20% rate for the next two years. The corporation just paid a $2 dividend and the next dividend will be paid one year from now. After two years of rapid growth dividends are expected to grow at a constant rate of 9% forever. -Refer to Exhibit 11.8.Assume that the annual dividend grows at a constant rate of 9% indefinitely instead of the supernormal growth.How much is the stock worth if dividends grow annually at 9%?

The most difficult part of valuing a bond is determining the required rate of return on this investment.

The growth rate of equity earnings without external financing is equal to

Which of the following statements regarding fundamental and relative valuation techniques is true?

Exhibit 11.4 Use the Information Below for the Following Problem(S) Davenport Corporation's last dividend was $2.70 and the directors expect to maintain the historic 3 percent annual rate of growth. You plan to purchase the stock today because you feel that the growth rate will increase to 5 percent for the next three years and the stock will then reach $25 per share. -Refer to Exhibit 11.4.How much should you be willing to pay for the stock if you feel that the 5 percent growth rate can be maintained indefinitely and you require a 17 percent return?

What is the value of a preferred stock that has a par value of $100,a required rate of return of 11%,and pays a 7 percent annual dividend?

A bond typically pays interest payments every six months equal to the coupon rate times the face value of the bond.

In 2004,Montpelier Inc.issued a $100 par value preferred stock that pays a 9 percent annual dividend.Due to changes in the overall economy and in the company's financial condition investors are now requiring a 10 percent return.What price would you be willing to pay for a share of the preferred if you receive your first dividend one year from now?

Which of the following factors influence an investor's required rate of return?

Exhibit 11.1 Use the Information Below for the Following 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 percent coupon rate (paid quarterly) and a par value of $1,000. The required rate of return is 4.25 percent. -Refer to Exhibit 11.1.What is the current value of these securities?

Which of the following is not a consideration in the three-step valuation process?

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?