Exam 7: Stock Valuation

Angel recently purchased a block of 100 shares of Hayley's Optical common stock for $6,000. The stock is expected to provide an annual cash flow of dividends of $400 indefinitely. Assuming a discount rate of 8 percent, how does the price Angel paid compare to the value of the stock?

The constant growth model is an approach to dividend valuation that assumes that dividends grow at a constant rate indefinitely.

Based on analysis of the company and expected industry and economic conditions, China Imports is expected to earn $4.60 per share of common stock next year. The average price/earnings ratio for firms in the same industry is 8. Calculate the estimated value of a share of China Imports common stock.

Efficient-market hypothesis is the theory describing the behavior of an assumed "perfect" market in which securities are typically in equilibrium, security prices fully reflect all public information available and react swiftly to new information, and, because stocks are fairly priced, investors need not waste time looking for mispriced securities.

Preemptive rights allow common stockholders to maintain their proportionate ownership in the corporation when new issues are made.

Table 7.1 -The required return is assumed to be 17 percent. Using the Gordon model, calculate the per share value of the stock for 2014. (See Table 7.1)

Jia's Fashions recently paid a $2 annual dividend. The company is projecting that its dividends will grow by 20 percent next year, 12 percent annually for the two years after that, and then at 6 percent annually thereafter. Based on this information, how much should Jia's Fashions common stock sell for today if her required return is 10.5%?

Tangshan China Company's stock is currently selling for $80.00 per share. The expected dividend one year from now is $4.00 and the required return is 13 percent. What is Tangshan's dividend growth rate assuming that dividends are expected to grow at a constant rate forever?

The liquidation value per share of common stock is the amount per share of common stock that would be received if all of a firm's assets were sold for their accounting value and the proceeds remaining were divided among common stockholders.

In an efficient market, the expected return and the required return are equal.

At year end, Tangshan China Company balance sheet showed total assets of $60 million, total liabilities (including preferred stock) of $45 million, and 1,000,000 shares of common stock outstanding. If Tangshan could sell its assets for $52.5 million, Tangshan's liquidation value per share of common stock is ________.

Which of the following is a difference between common stock and bonds?

Identify whether the key characteristic describes common stock (CS) or preferred stock (PS). ________ 1. Source of financing which places minimum constraints on the firm ________ 2. Used by young firms receiving investment funds from venture capital firms ________ 3. Potential dilution of earnings and voting power ________ 4. Fixed financial obligation ________ 5. Increases the firm's borrowing power ________ 6. May have cumulative and participating features ________ 7. May be convertible into another type of security ________ 8. Last to receive earnings or distribution of assets in the event of bankruptcy ________ 9. Frequently includes a call feature

According to the efficient market hypothesis, prices of actively traded stocks ________.

Zheng Sen's Chinese Take-Out had earnings before interest and taxes of $4,000,000 last year. The firm has a marginal tax rate of 40 percent and currently has the following capital structure: (a) Calculate the firm's after-tax return on equity (ROE) and earnings per share (EPS). (b) If the firm retires $4,000,000 of preferred stock using the proceeds from an equal increase in long-term debt, what would have been the after-tax return on equity (ROE) and earnings per share (EPS)? (c) If the firm retires $4,000,000 of preferred stock using the proceeds from the sale of 500,000 shares of common stock, what would have been the after-tax return on equity (ROE) and earnings per share (EPS)?

The Bradshaw Company's most recent dividend was $6.75. The historical dividend payment by the company shows a constant growth rate of 5 percent per year. What is the maximum you would be willing to pay for a share of its common stock if your required rate of return is 8 percent?

Aunt Tilly's Fur Company has been experiencing several years of financial difficulty and, thus, has considered maintaining its dividend payment at $2.50 indefinitely. What is the value of its common stock if the required rate of return is 8.5 percent?

Unlike creditors, equityholders are owners of the firm.

Ted has 10 shares of Grand Company. Based on the company's dividend policy, Ted will receive a total of $450 a year in perpetuity. What is the value of each share if the rate of interest is 8 percent?

Stock rights allow stockholders to purchase additional shares of stock in direct proportion to the number of shares they own.