CHAPTER 02 14FINANCIAL MARKETS AND INSTITUTIONS 1

21. Universal Forests current stock price is $154.00 and it is likely to pay a $5.23 dividend next year. Since analysts estimate Universal Forest will have a 13.0% growth rate what is the required return?

A firm has an expected dividend next year of $1.20 per share, a zero growth rate

Suppose Ace, over the last few years, has had an 18 percent average return on equity (ROE) and has paid out 20 percent of its net income as dividends. Under what conditions could this information be used to help estimate the firm’s expected future growth rate, g? Estimate ks using this procedure for determining g.

If earnings' growth rates are often used as estimated of dividend growth rates. However, these forecasts

When investing in a company, the goal is to buy shares at a low price and then sell them at a higher price. Individual stocks may go up or down independent of how “The Market” is doing overall. Stock market indices such as the Dow Jones Average, the NASDAQ, and the Standard and Poors 500 report how “The Market” is doing “on average.” To check

Capital Gains Yield: I was able to find the stock prices by multiplying the P/E ratio times EPS, both of which are found in exhibit 6. g = 1.90%

What are the expected dividend yield and capital gains yield during the fourth year (from Year 3 to Year 4)?

Expected return on market rate Rm is provided at page 175 in Myers and it is the average nominal return on stocks for the last century, the value is 11.7%

Solutions to Valuation Questions 1. Assume you expect a company’s net income to remain stable at $1,100 for all future years, and you expect all earnings to be distributed to stockholders at the end of each year, so that common equity also remains stable for all future years (assumes clean surplus). Also, assume the company’s β = 1.5, the market risk premium is 4% and the 20-30 year yield on risk free treasury bonds is 5%. Finally, assume the company has 1,000 shares of common stock outstanding. a. Use the CAPM to estimate the company’s equity cost of capital. • re = RF + β * (RM – RF) = 0.05 + 1.5 * 0.04 = 11% b. Compute the expected net distributions to stockholders for each future year. • D = NI – ΔCE = $1,100 – 0 = $1,100 c. Use the

10. I used November 4, 2014, data to calculate the daily return on holding Under Armour shares for the past year:

The return on equity conveys the profits of the company as a rate of return on the amount of owners' equity. ROE uses average owners equity over the specified time period and net income. Historically a ROE of between 10% and 15% were considered average. Recently higher rates in growth industries have been greater.

NASDAQ is another force of competition for the NYSE. The crucial difference between the NYSE and NASDAQ is their trading principles. NYSE is an auction market, and NASDAQ is a dealer’s market. In the NYSE, the buyers and sellers trade physically by comparing bid prices and ask prices. Trading acquires a different climate in the NASDAQ when compared to the NYSE. The buyers and sellers transact through a dealer. There are only two ways to make a trade in the NASDAQ: Stock brokers must either call the dealer or use the online execution system to enter an order. In terms of technology NASDAQ may have the upper hand.

* We assume the cost of capital to be a stated annual rate to facilitate calculations;

B) The estimated regression equation relating each of the individual stocks to the S&P 500 is shown below. The value of [pic]for each equation is also shown.

If financial institutions are to obtain significant yields, then foreign markets can be a valuable remedy for them. Bertos Financial Services Inc., a major financial institution based in Tennessee is keen to achieve extra miles regarding foreign investment. Consequently, these ideal foreign markets have to be selected from five suitable countries, then analysed regarding prospects that can enable the institution to thrive as well.