Principles of Managerial Finance, Student Value Edition Plus MyLab Finance with Pearson eText - Access Card Package (15th Edition) (Pearson Series in Finance)
15th Edition
ISBN: 9780134830209
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
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Question
Chapter 7, Problem 7.1STP
a.
Summary Introduction
To determine: The value of the common stock if the growth rate is 0.00% to infinity.
a.
Expert Solution
Answer to Problem 7.1STP
The value of the common stock if the growth rate is 0.00% to infinity is $15.00.
Explanation of Solution
Given information:
Required rate: 12.00%
Annual dividend: $1.80
Formula used to calculate the stock price if the growth rate is 0.00% to infinity.
Calculation of the stock price:
Therefore, the stock price is $15.00.
b.
Summary Introduction
To determine: The value of the common stock if the growth rate is 5.00% to infinity.
b.
Expert Solution
Answer to Problem 7.1STP
The value of the common stock if the growth rate is 5.00% to infinity is $27.00.
Explanation of Solution
Given information:
Required rate: 12.00%
Annual dividend: $1.80
Growth rate: 5.00%
Formula used to calculate the stock price
Calculation of the stock price if the growth rate is 5.00% to infinity:
Therefore, stock price is $27.00.
b.
Summary Introduction
To determine: The stock price if expected to grow at an annual rate of 5% for each of the next 3 years, followed by a constant annual growth rate of 4% in year 4 to infinity.
b.
Expert Solution
Answer to Problem 7.1STP
The stock price if expected to grow at an annual rate of 5% for each of the next 3 years, followed by a constant annual growth rate of 4% in year 4 to infinity is $24.03.
Explanation of Solution
Calculation of the stock price:
Excel working:
Therefore, stock price is $24.03.
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Question content area top
Part 1
(Common stock valuation) Assume the following:
•
the investor's required rate of return is
14.5
percent,
•
the expected level of earnings at the end of this year
(E1)
is
$6,
•
the retention ratio is
40
percent,
•
the return on equity
(ROE)
is
14
percent (that is, it can earn
14
percent on reinvested earnings), and
•
similar shares of stock sell at multiples of
6.742
times earnings per share.
Questions:
a. Determine the expected growth rate for dividends.
b. Determine the price earnings ratio
(P/E1).
c. What is the stock price using the P/E ratio valuation method?
d. What is the stock price using the dividend discount model?
e. What would happen to the P/E ratio
(P/E1)
and stock price if the company increased its retention rate to
80
percent (holding all else constant)? What would happen to the P/E ratio
(P/E1)
and stock price if the company paid out all its earnings in the form of dividends?…
Q-1.
(a)
The following table gives Foust Company’s earnings per share (EPS) for the last 10 years. The common stock, 7.8 million shares outstanding, is now (1/1/20) selling for $65.00 per share. The expected dividend at the end of the current year (12/31/20) is 55% of the 2019 EPS. Because investors expect past trends to continue, g may be based on the historical earnings growth rate. (Note that 9 years of growth are reflected in the 10 years of data.)
Foust has 25-year non-callable bonds outstanding with a face value of $1,000, an 12% annual coupon, and a market price of $1,320. Foust can issue perpetual preferred stock at a price of $47.50 a share. The stock would pay a constant annual dividend of $3.80 a share. Its capital structure, considered to be optimal, is as follows:Debt $111,000,000Preferred Stock $4,000,000Common equity $155,000,000Total liabilities and equity $270,000,000i. If the company was to issue new debt, what would be a reasonable estimate of the interest rate on…
Chapter 7 Solutions
Principles of Managerial Finance, Student Value Edition Plus MyLab Finance with Pearson eText - Access Card Package (15th Edition) (Pearson Series in Finance)
Ch. 7.1 - What are the key differences between debt and...Ch. 7.2 - What risks do common stockholders take that other...Ch. 7.2 - Prob. 7.3RQCh. 7.2 - Explain the relationships among authorized shares,...Ch. 7.2 - Prob. 7.5RQCh. 7.2 - Prob. 7.6RQCh. 7.2 - Explain the cumulative feature of preferred stock....Ch. 7.3 - Describe the events that occur in an efficient...Ch. 7.3 - Prob. 7.9RQCh. 7.3 - Describe, compare, and contrast the following...
Ch. 7.3 - Describe the free cash flow valuation model, and...Ch. 7.3 - Explain each of the three other approaches to...Ch. 7.4 - Prob. 7.13RQCh. 7.4 - Assuming that all other variables remain...Ch. 7 - Prob. 7.1STPCh. 7 - Learning Goal 5 ST7-2 Free cash flow valuation...Ch. 7 - Prob. 7.1WUECh. 7 - Prob. 7.2WUECh. 7 - Prob. 7.3WUECh. 7 - Prob. 7.4WUECh. 7 - Prob. 7.5WUECh. 7 - Prob. 7.6WUECh. 7 - Authorized and available shares Aspin...Ch. 7 - Preferred dividends Acura Labs Inc. has an...Ch. 7 - Learning Goal 2 P7-3 Preferred dividends In each...Ch. 7 - Learning Goal 2 P7-4 Convertible preferred stock...Ch. 7 - Learning Goal 4 P7-5 Preferred stock valuation TXS...Ch. 7 - Prob. 7.6PCh. 7 - Preferred stock valuation Jones Design wishes to...Ch. 7 - Learning Goal 4 P7-8 Common stock value: Constant...Ch. 7 - Common stock value: Constant growth McCracken...Ch. 7 - Learning Goal 4 P7- 11 Common stock value:...Ch. 7 - Prob. 7.12PCh. 7 - Prob. 7.13PCh. 7 - Learning Goal 4 P7-14 Common stock value: Variable...Ch. 7 - Prob. 7.15PCh. 7 - Prob. 7.16PCh. 7 - Learning Goal 5 P7-17 Free cash flow valuation...Ch. 7 - Prob. 7.20PCh. 7 - Prob. 7.21PCh. 7 - Prob. 7.22PCh. 7 - Prob. 7.23PCh. 7 - Integrative: Risk and valuation Hamlin Steel...Ch. 7 - Prob. 7.25P
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