Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 4, Problem 4PS
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Company Y does not plow back any earnings and is expected to produce a level dividend stream of $5.9 a share. If the current stock price is $40.9, what is the market capitalization rate? (Enter your answer as a percent rounded to 2 decimal place.)
The Wellington Co. likes to use the dividend discount model to estimate its cost of equity. What should that be (in percent to two places) if their stock today is $54 and with a constant dividend growth of 3% their next dividend is estimated to be $0.91?
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Fun Tyne plc declares a dividend payment of 20p per share. Ignoring taxes and the time value of money, and assuming that markets are efficient, you would expect stock price to:a. Immediately increase by 20p on the payment dateb. Immediately increase by 20p on the ex-dividend datec. Immediately decrease by 20p on the declaration dated. Immediately decrease by 20p on the ex-dividend datee. None of the above
Chapter 4 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 4 - True/false True or false? a. All stocks in an...Ch. 4 - Dividend discount model Respond briefly to the...Ch. 4 - Dividend discount model Company X is expected to...Ch. 4 - Dividend discount model Company Y does not plow...Ch. 4 - Constant-growth DCF model Company Zs earnings and...Ch. 4 - Dividend discount model Company Z-prime is like Z...Ch. 4 - Dividend discount model If company Z (see Problem...Ch. 4 - Prob. 8PSCh. 4 - Prob. 9PSCh. 4 - Free cash flow Under what conditions does r, a...
Ch. 4 - Prob. 11PSCh. 4 - Prob. 12PSCh. 4 - Horizon value Suppose the horizon date is set at a...Ch. 4 - Stock quotes Go to finance.yahoo.com and get...Ch. 4 - Two-stage DCF model Consider the following three...Ch. 4 - Constant-growth DCF model Pharmecology just paid...Ch. 4 - Two-stage DCF model Company Qs current return on...Ch. 4 - Cost of equity capital Each of the following...Ch. 4 - Growth opportunities Alpha Corps earnings and...Ch. 4 - Prob. 23PSCh. 4 - Two-stage DCF model Compost Science Inc. (CSI) is...Ch. 4 - DCF and free cash flow Permian Partners (PP)...Ch. 4 - DCF and free cash flow Construct a new version of...Ch. 4 - Valuing a business Mexican Motors market cap is...Ch. 4 - Valuing Tree cash flow Phoenix Corp. faltered in...Ch. 4 - Constant-growth DCF formula The constant-growth...Ch. 4 - DCF valuation Portfolio managers are frequently...Ch. 4 - Valuing a business Construct a new version of...
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- 6. Dividend discount model (S4.3) Company X is expected to pay an end-of-year dividend of $5 a share. After the dividend, its stock is expected to sell at $110. If the cost of equity is 8%, what is the current stock price?arrow_forward1. Fun Tyne plc declares a dividend payment of 20p per share. Ignoring taxes and the time value of money, and assuming that markets are efficient, you would expect stock price to: a. Immediately increase by 20p on the payment date b. Immediately increase by 20p on the ex-dividend date c. Immediately decrease by 20p on the declaration date d. Immediately decrease by 20p on the ex-dividend date e. Noneoftheabove 2. Lois selects securities to invest in after carefully examining the fundamentals of a company, using the accounting statements in its annual reports. Peter seeks to earn abnormal returns solely by studying stock price charts and investing based on the patterns he finds in the past prices. Which one of the following statements is correct? a. If Lois earns abnormal returns this violates weak-form market efficiency. If Peter earns abnormal returns this violates strong-form market efficiency. b. If Lois earns abnormal returns this violates strong-form market efficiency. If Peter…arrow_forwardThe cost of retained earnings True or False: It is free for a company to raise money through retained earnings, because retained earnings represent money that is left over after dividends are paid out to shareholders. True False The cost of equity using the CAPM approach The current risk-free rate of return (rRF ) is 4.23% while the market risk premium is 6.17%. The D’Amico Company has a beta of 1.56. Using the capital asset pricing model (CAPM) approach, D’Amico’s cost of equity is . The cost of equity using the bond yield plus risk premium approach The Kennedy Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company’s cost of internal equity. Kennedy’s bonds yield 10.28%, and the firm’s analysts estimate that the firm’s risk premium on its stock over its bonds is 5.89. Based on the bond-yield-plus-risk-premium approach, Kennedy’s cost of internal equity is:…arrow_forward
- (i) Assuming a 13.9% discount rate, estimate the value of Union Chemical Bhd. (ii) Determine whether Union Chemical Bhd is undervalued or overvalued. (iii) “The constant-growth model should not be used with just any stock.”Explain with reasons the assumptions used by analysts when using the constant-growth dividend model.arrow_forward3. Guava Computers currently has earnings per share of $2.40, a dividend payment per share of $0.80, and book equity per share of $10. a. What is the company's rate of return on equity? What is its plowback ratio? b. Using the plowback/rate of return method, estimate the growth rate of dividend payments per share. What is your estimate of the capitalization rate on Guava's stock if the stock is currently selling for $23.20 с. per share? d. What is your estimate of the company's present value of growth opportunities if its discount rate is 15 percent?arrow_forwardEstimate its cost of common equity, Maxell and Associcates recently hired you. Obtain the following data, D0=$0.90, P0= $27.50, gl=7% constant. Based on the dividend grwoth model, What is the cost of common for reinvested earnings? (10.50%,9.29%,10.08%,9.68%,10.92%)arrow_forward
- Find the share price given the following information. The setup here is all correct, but the answer should be $66.61 per share. What am I doing wrong? Discount rate (Ke) = 10%.arrow_forwardQuestion Help ▼ According to the Generalized Dividend Model, the final sales price of a stock depends on the following except the O A. price of the stock in the last period. OB. number of periods. OC. required retum on investments in equity. O D. dividend payments. If a company called Advanced Technologies has yet to pay a dividend on its stock, the generalized dividend model predicts that the company's stock may still have value because O A. people expect Advanced Technologies to pay dividends in the future. B. all companies that have any physical assets have value. OC. the required return on investment for high technology companies is zero. O D. all companies are legally required to pay dividends within ten years of the initial public offering of stock. Click to select your answer.arrow_forwardExpected returns, dividends, and growth The constant growth valuation formula has dividends in the numerator. Dividends are divided by the difference between the required return and dividend growth rate as follows: Pˆ0 = D1(rs – g) Which of the following statements is true? Increasing dividends may not always increase the stock price, because less earnings may be invested back into the firm and that impedes growth. Increasing dividends will always increase the stock price. Increasing dividends will always decrease the stock price, because the firm is depleting internal funding resources. Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $2.05 at the end of the year. Its dividend is expected to grow at a constant rate of 6.50% per year. If Walter’s stock currently trades for $28.00 per share, what is the expected rate of return? 13.82% 656.87% 992.14%…arrow_forward
- d. What is the rate of return on your margined position (assuming again that you invest $15,000 of your own money) if Xtel is selling after 1 year at: (i) $83.62; (ii) $74; (iii) $64.38? What is the relationship between your percentage return and the percentage change in the price of Xtel? Assume that Xtel pays no dividends. (Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.) Rate of return for ear. i.) ? ii.) ? iii.) -22.51arrow_forwardTrue or False: It is free for a company to raise money through retained earnings, because retained earnings represent money that is left over after dividends are paid out to shareholders. False True The cost of equity using the CAPM approach The current risk-free rate of return (rRFrRF) is 4.23% while the market risk premium is 6.63%. The Allen Company has a beta of 0.78. Using the capital asset pricing model (CAPM) approach, Allen’s cost of equity is (9.40%, 8.46, 11.28, 9.87) . The cost of equity using the bond yield plus risk premium approach The Hoover Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company’s cost of internal equity. Hoover’s bonds yield 10.28%, and the firm’s analysts estimate that the firm’s risk premium on its stock over its bonds is 3.55%. Based on the bond-yield-plus-risk-premium approach, Hoover’s cost of internal equity is: 13.83%…arrow_forwardTrue or False: It is free for a company to raise money through retained earnings, because retained earnings represent money that is left over after dividends are paid out to shareholders. False True The cost of equity using the CAPM approach The current risk-free rate of return (TRF) is 3.86% while the market risk premium is 6.63%. The Monroe Company has a beta of 0.92. Using the capital asset pricing model (CAPM) approach, Monroe's cost of equity is The cost of equity using the bond yield plus risk premium approach The Lincoln Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company's cost of internal equity. Lincoln's bonds yield 11.52%, and the firm's analysts estimate that the firm's risk premium on its stock over its bonds is 4.95%. Based on the bond-yield-plus-risk-premium approach, Lincoln's cost of internal equity is: 19.76% 16.47% 15.65% O 18.12%arrow_forward
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Dividend disocunt model (DDM); Author: Edspira;https://www.youtube.com/watch?v=TlH3_iOHX3s;License: Standard YouTube License, CC-BY