Scribd
Upload
75 views

Practice Problem Set #6: Stocks I Theoretical and Conceptual Questions: (See Notes or Textbook For Solutions)

This document contains practice problems related to valuing stocks. It includes: 1) Eight practice problems calculating stock prices and returns based on given dividend payments, growth rates, and required rates of return. 2) A conceptual question about valuing a company that does not pay dividends asking students to consider how the value of a stock depends on dividends. 3) Practice valuing stocks using the dividend discount model and multiples valuation approaches like P/E ratios.

Uploaded by

raymond
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
75 views

Practice Problem Set #6: Stocks I Theoretical and Conceptual Questions: (See Notes or Textbook For Solutions)

This document contains practice problems related to valuing stocks. It includes: 1) Eight practice problems calculating stock prices and returns based on given dividend payments, growth rates, and required rates of return. 2) A conceptual question about valuing a company that does not pay dividends asking students to consider how the value of a stock depends on dividends. 3) Practice valuing stocks using the dividend discount model and multiples valuation approaches like P/E ratios.

Uploaded by

raymond
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

Practice Problem Set #6: Stocks I

Theoretical and conceptual questions:


(see notes or textbook for solutions)

1. Distinguish debt from equity. Consider rights of shareholders vs. debtholders, nature of cash
flows, taxation etc.
2. How is preferred stock like debt?
3. Does the value of a share of stock depend on how long you keep it?
4. Why does the value of a share of stock depend on dividends?
5. How would you value shares of a company that does not pay dividends?
6. What are the two components of the return on common stock?
7. Differentiate between realized return and expected returns on stock.
8. Explain how you could use multiples such as the P/E ratio to value stock.

Practice Problems:

1. Suppose you bought one share of Pouce Coupe Resorts (PCR) one year ago for $9.
Today, you received a dividend payment of $1 and sold the share for $9.50. What was
your realized return on PCR over the last year?

2. Suppose you bought a share of Apple Computer one year ago for $51. This morning
you received a dividend of $0.48 and sold the share for $59. What was your realized
return?

3. This morning, the Bank of Dawson Creek (BDC) paid a $2 dividend (it pays dividends
once per year) and these are expected to grow at the constant rate of 5% per year. If
the required return on BDC is 15%, calculate the current stock price of BDC.

4. Yesterday, the Hudson Hope Computer (HHC) announced a $3 dividend to be paid in


one year's time. If the current price of HHC is $30 and the required return on HHC is 20%,
what is the (constant) growth rate consistent with the current stock price?

5. Dilbert Conglomerated has just gone public. Over the first year, dividends are expected
to grow 18%. The next two years after that, dividend growth will be 12%. Finally,
dividend growth will settle into a rate of growth of 10% from then on. Assume the company
just paid a dividend of $1.00.
(a) If investors require a rate of return of 14%, how much should you pay for this
stock?

(b) Assume the required rate of return continues to be 14%. If you buy the stock at
the price found in part(a) above, and sell it after 3 years, what is your realized
rate of return if you just put your dividends under your mattress as you get them?
6. Intercar Manufacturing produces audio equipment for the automotive market. It is
growing very rapidly and does not expect to pay a dividend for the next few years. At
the end of year 5 it expects to pay a dividend of $1.00 per share. The dividend is then
expected to grow at 15% in year 6 and from year 7 settle down to a long run growth rate
of 4% per year. If investors require a 14% return to hold the common stock, what price
per Intercar share would you expect to pay today?

7. Pratt Inc. manufactures aircraft parts. Pratt has earnings per share (EPS) of $7.50 and
just paid a dividend of $3.75. The growth rate expected is 3% in perpetuity and
investors require a 8% return. The share is currently selling for $75 per share. A very
good comparable company, Whitney Co. has a P/E ratio of 15.

(a) What is your estimate of Pratt Inc.’s share price if you use a multiples valuation
method?

(b) What does the share price calculated in a. tell you about the current value of
Pratt Inc.?

(c) Using a discounted cash flow valuation model, what is your best estimate of
Pratt’s share price?

8. Duffs Co. is growing quickly. Dividends are expected to grow at a 24% rate for the next
three years, with the growth rate falling off to a constant 6% thereafter. If the required
return is 11% and the company just paid a $1.90 dividend, what is the current share
price?

You might also like