Principles of Corporate Finance
13th Edition
ISBN: 9781260465099
Author: BREALEY, Richard
Publisher: MCGRAW-HILL HIGHER EDUCATION
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Question
Chapter 13, Problem 12PS
Summary Introduction
To discuss: Person X’s opinion to company A and company B.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Question 6. Suppose that the consensus forecast of security analysts of your favorite company is that earnings next year will be $5.00 per share. The company plows back 50% of its earnings and if the Chief Financial Officer (CFO) estimates that the company's return on equity (ROE) is 16%. Assuming the plowback ratio and the ROE are expected to remain constant forever:
Suppose that you are confident that 10% is the required rate of return on the stock.
What does the market price of $50.00 per share imply about the market’s estimate of the company’s expected return on equity? (please give a number)
*Make sure to input all percentage answers as numeric values without symbols, and use four decimal places of precision. For example, if the answer is 6%, then enter 0.0600.
Answer using the Gordon Growth Model
under the Efficient Market Hypothesis
Jimmy decides to invest in MSFT common
stock. He expects that the stock will pay $1
dividend per share next year and its price
will be $20 per share by the end of year
when he is going to resell the stock. After
some careful analysis Jimmy finds that the
company's business operation risk has
increased over the past year due to the
recent financial and economic crisis. As a
result, his required rate of return on the
stock is 15%. What is the maximal price that
Jimmy is willing to pay for the stock?
a. $16.33
b. $17.15
c. $18.26
d. $19.47
e. $20.18
K
Melissa Cutt is thinking about buying some shares of EZLawn Equipment, at $46.30 per share. She
expects the price of the stock to rise to $47.65 over the next 3 years. During that time she also
expects to receive annual dividends of $6.79 per share.
a. What is the intrinsic worth of this stock, given a required rate of return of 12%?
b. What is its expected return?
BCCCID
a. The intrinsic worth of this stock is $ 50.22. (Round to the nearest cent.)
b. The expected return is %. (Round to one decimal place.)
Chapter 13 Solutions
Principles of Corporate Finance
Ch. 13 - Market efficiency True or false? The...Ch. 13 - Prob. 2PSCh. 13 - Market efficiency Which (if any) of these...Ch. 13 - Prob. 4PSCh. 13 - Market efficiency How would you respond to the...Ch. 13 - Market efficiency Respond to the following...Ch. 13 - Prob. 7PSCh. 13 - Prob. 8PSCh. 13 - Market efficiency evidence Which of the following...Ch. 13 - Prob. 10PS
Ch. 13 - Prob. 11PSCh. 13 - Prob. 12PSCh. 13 - Market efficiency implications What does the...Ch. 13 - Prob. 14PSCh. 13 - Prob. 15PSCh. 13 - Abnormal returns Here are alphas and betas for...Ch. 13 - Prob. 18PSCh. 13 - Behavioral finance True or false? a. Most managers...Ch. 13 - Prob. 20PSCh. 13 - Prob. 21PSCh. 13 - Prob. 22PS
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Investment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals. Annual return projections vary depending on whether the general economic conditions are improving, stable, or declining. The anticipated annual return percentages for each market segment under each economic condition are as follows: Assume that an individual investor wants to select one market segment for a new investment. A forecast shows improving to declining economic conditions with the following probabilities: improving (0.2), stable (0.5), and declining (0.3). What is the preferred market segment for the investor, and what is the expected return percentage? At a later date, a revised forecast shows a potential for an improvement in economic conditions. New probabilities are as follows: improving (0.4), stable (0.4), and declining (0.2). What is the preferred market segment for the investor based on these new probabilities? What is the expected return percentage?arrow_forwardQuestion 1 (Diversification Consider the following: 1. Strategy I: Suppose that you invest $100 in a stock. There is a 60% chance that the stock will go up in value by $10 at by the end of this year. There is a 40% chance that the stock will go down in value by $5 by the end of the year. 2. Strategy II: Suppose that you invest $10 in 10 separate stocks. Each of these stocks also has a 60% chance of going up by 10% and a 40% chance of going down by 5% by the end of the year, and the performance of each of them is independent from the performance of the others. The rate of return on each of these investment strategy can be described as Money at end of year Money at beginning of year Calculate the expectation and variance of rates of return for these two strategies. 1arrow_forwardSubject: Financial strategy & policy Question No 3 (part i) Answer the following. i) The future earnings, dividends, and common stock price of Nabeel Inc. are expected to grow 7% per year. Common stock currently sells for $23.00 per share; its last dividend was $2.00. a) Using the DCF approach, what is its cost of common equity? b) If the firm’s beta is 1.6, the risk-free rate is 9%, and the average return on the market is 13%, what will be the firm’s cost of common equity using the CAPM approach? c) If the firm’s bonds earn a return of 12%, based on the bond-yield-plus-risk-premium approach, what will be rs? d) If you have equal confidence in the inputs used for the three approaches, what is your estimate of cost of common equity?arrow_forward
- Your first task in your new job at an investment bank is to price a new stock issue. You expect the stock will pay a dividend of $2 per share starting 1 year after issue and that dividends will grow at 3.0% per year thereafter. The return on similar stocks is 5.5%. a. What price would you assign to the stock?arrow_forwardOn average, IPOs of firms tend to perform ________ over a period of a year or longer. Question 24 options: well poorly about the same as the S\&P 500 indexarrow_forwardA company is considering the following two dividend policies for the next five years. Year Policy #1 Policy #2 4.00 6.90 2 4.00 2.40 4.00 5.00 4 4.00 1.70 4.00 4.00 Required: A. What is the total of the dividends per share that the stockholders will receive over the full five year period? B. If investors see no difference in the risk between the two policies, and therefore apply a 9.4% discount rate to both policies, what is the present value of each dividend stream? C. Suppose investors see Policy #2 as the riskier of the two, and they therefore apply a 9.4% discount rate to Policy #1 and a 12% discount rate to Policy #2. Under this scenario, what is the present value of each dividend stream? D. What conclusions can be drawn from this exercise? A Policy #1 Policy #2 Year 1. 2 3 4 Total over five years B Policy #1 9.40% Year Cash Flow PV Factor Present value Present value Policy #2 9.40% Cash Flow PV Factor Present value Year 1. 3 4 5 Present value Policy #1 9.40% Year Cash Flow PV…arrow_forward
- which one is correct? QUESTION 5 Recently you have received a tip that the stock of Bubbly Incorporated is going to rise from $57 to $61 per share over the next year. You know that the annual return on the S&P 500 has been 9.25 percent and the 90-day T-bill rate has been yielding 3.75 percent per year over the past 10 years. If beta for Bubbly is 0.85, will you purchase the stock? a. Yes, because the expected return equals the estimated return. b. Yes, because it is undervalued. c. No, because it is undervalued. d. No, because it is overvalued. e. Yes, because it is overvalued.arrow_forwardExplain how a financial market operates? Which of the investment constraints is expected to have the most impact on your decision process? You plan to buy common stock and hold it for one year. You expect to receive both ₱150 and ₱260 from the sale of the stock at the end of the year. How much will you pay for the stock, if you want to a. Have a return of 8% b. A return of 20% c. A return of 15%arrow_forwardSuppose that the consensus forecast of security analysts of your favorite company is that earnings next year will be $5.00 per share. The company plows back 50% of its earnings and if the Chief Financial Officer (CFO) estimates that the company's return on equity (ROE) is 16%. Assuming the plowback ratio and the ROE are expected to remain constant forever: Suppose you observe that the stock is selling for $50.00 per share, what would you conclude about either your belief of the stock’s required rate of return or the CFO’s estimate of the company’s return on equity? (select all that apply)arrow_forward
- If you look at stock prices over any year, you will find a high and low stock price for the year. Instead of a single benchmark PE ratio, we have a high and low PE ratio for each year. We can use these ratios to calculate a high and a low stock price for the next year. Suppose we have the following information on a particular company. Year 1 $ 62.18 40.30 2.35 a. High target price b. Low target price Year 2 $67.29 43.18 2.58 Year 3- $74.18 39.27 2.73 Year 4 $78.27 46.21 High price Low price EPS Earnings are expected to grow at 9 percent over the next year. 6. What is the high target stock price in one year? 32.16. Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g.. b. What is the low target stock price in one year? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. 2.890arrow_forwardIf you look at stock prices over any year, you will find a high and low stock price for the year. Instead of a single benchmark PE ratio, we now have a high and low PE ratio for each year. We can use these ratios to calculate a high and a low stock price for the next year. Suppose we have the following information on a particular company: High price. Low price EPS Year 1 $ 86.77 69.09 6.50 Year 2 Year 3 $97.67 $118.97 81.47 8.92 82.11 8.58 Year 4 $130.84 108.02 10.17 Earnings are expected to grow at 8 percent over the next year. a. What is the high target stock price over the next year? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. b. What is the low target stock price over the next year? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. > Answer is complete but not entirely correct. a. High target price $ 136.23 b. Low target price $ 101.58arrow_forward10.4 Obtain at least 5 years’ worth of daily or weekly stock price data for a stock of your choice. a. Compute annual volatility using all the data. b.Compute annual volatility for each calendar year in your data. How does volatility vary over time? c.Compute annual volatility for the first and second half of each year in your data. How much variation is there in your estimate? how do I do these in excel?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Essentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Fundamentals of Financial Management, Concise Edi...FinanceISBN:9781305635937Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Essentials of Business Analytics (MindTap Course ...
Statistics
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Fundamentals of Financial Management, Concise Edi...
Finance
ISBN:9781305635937
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Dividend disocunt model (DDM); Author: Edspira;https://www.youtube.com/watch?v=TlH3_iOHX3s;License: Standard YouTube License, CC-BY