Financial Management Chapter 8 K

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ey Chapter 8 Stocks and Their Valuation LEARNING OBJECTIVES After reading this chapter, students should be able to: • Identify some of the more important rights that come with stock ownership and define the following terms: proxy, proxy fight, takeover, and preemptive right. • Briefly explain why classified stock might be used by a corporation and what founders’ shares are. • Differentiate between closely held and publicly owned corporations and list the three distinct types of stock market transactions. • Determine the value of a share of common stock when: (1) dividends are expected to grow at some constant rate, (2) dividends are expected to remain constant, and (3) dividends are expected to…show more content…
b. The preemptive right is clearly important to the stockholders of closely held firms whose owners are interested in maintaining their relative control positions. SOLUTIONS TO END-OF-CHAPTER PROBLEMS 8-1 D0 = $1.50; g1-3 = 5%; gn = 10%; D1 through D5 = ? D1 = D0(1 + g1) = $1.50(1.05) = $1.5750. D2 = D0(1 + g1)(1 + g2) = $1.50(1.05)2 = $1.6538. D3 = D0(1 + g1)(1 + g2)(1 + g3) = $1.50(1.05)3 = $1.7364. D4 = D0(1 + g1)(1 + g2)(1 + g3)(1 + gn) = $1.50(1.05)3(1.10) = $1.9101. D5 = D0(1 + g1)(1 + g2)(1 + g3)(1 + gn)2 = $1.50(1.05)3(1.10)2 = $2.1011. 8-2 D1 = $0.50; g = 7%; ks = 15%; [pic] = ? [pic] 8-3 P0 = $20; D0 = $1.00; g = 10%; [pic] = ?; ks = ? [pic] = P0(1 + g) = $20(1.10) = $22. ks = [pic] + g = [pic] + 0.10 = [pic] + 0.10 = 15.50%. ks = 15.50%. 8-4 Dp = $5.00; Vp = $60; kp = ? kp = [pic] = [pic] = 8.33%. 8-5 a. The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2. b. 0 1 2 3 | | | | 1.25 1.50 1.80 1.89 37.80 = [pic] The horizon, or terminal, value is
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